The  Morals  of 
onopoiy  and  Competition 


I5EED 


UNIVERSITY  OF  CALIFORNIA 
AT   LOS  ANGELES 


GIFT  OF 

JALiES   il.    TuFTS 


=^ 


The  Morals  of 
Monopoly  and  Competition 


BY 

HOMER  BLOSSER  REED,  Ph.  D. 

ASSISTANT   PROFESSOR   OF   PSYCHOLOGY   AND    PHILOSOPHY 
UNIVERSITY  OF  IDAHO 


QII7C  QlollcgiaU  ^rr«a 

George  Banta  Publishing  Company 

Menasha,  Wisconsin 

1916 


i 


«    *  • 


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PREFACE 

This  little  book  was  begun  in  connection  with  a 
"    Seminar  in   the  Ethics  of  Business  under   Professor 
y   James  H.  Tufts  of  the  University  of  Chicago,  and  was 
-^  written  during  the  spring  and  summer  of  1912.     In 
;,-  publishing  it  at  this  delayed  date,  the  author  did  not 
^  undertake  to  make  a  revision  for  the  reason  that  the 
a>  principles  in  question  have  not  changed  and  are  more 
vital    than   ever.     Much   progress   has  however  been 
^  made  in  the  solution  of  the  problems  of  monopoly  and 
^  competition  and  many  sources  regarding  the  methods  of 
S  competition  have  come  to  light  since  1912.     However, 
the  various  papers  on  the  Federal  Trade  Commission 
13  and  its  Problems  in  the  Annals  of  the  American  Acad- 
vj  emy  of  Political  and  Social  Science,  January,   1916, 
■;5y  review  these  sufficiently  and  should  be  read  in  con- 
I  nection  with  this  book.     A  word,  however,  may  be 
I  said  with  reference  to  the  Clayton  Act  and  the  Federal 
^VTrade  Commission  Act  which  embody  the  important 
legislation    made    since    1912    upon    the    problem    in 
o  question.     The  Clayton  Act,  among  other  things,  for- 
K  bids  price  discrimination,  rebating  on  merchandise,  and 
tp  making  the  sale  of  a  monopolistic  article  conditional 
upon  the  sale  of  other  articles,  where  the  effect  may  be 
"to  substantially  lessen  competition  or  tend  to  create 
a  monopoly."    The  Federal  Trade  Commission  Act 
forbids  "unfair  methods  of  competition"  and  empowers 
the  Commission  to  bring  a  proceeding  against  a  cor- 
poration using  an  unfair  method  of  competition  "if  it 


4S8.'5,'5 


IV  PREFACE 

shall  appear  that  a  proceeding  by  it  in  respect  thereof 
would  be  to  the  interest  of  the  public."  It  is  not 
stated,  however,  what  the  meaning  is  of  these  phrases: 
"to  substantially  lessen  competition,"  "to  tend  to 
create  a  monopoly,"  "unfair  competition"  or  "the 
interest  of  the  public."  Evidently  there  is  room  here 
for  judicial  interpretation.  By  what  method  shall  a 
judge  settle  these  questions?  Shall  he  merely  consider 
what  has  been  laid  down  by  the  law  in  the  past  or  shall 
he  study  each  case  with  reference  to  its  facts  and  with 
reference  to  the  future  public  good?  It  is  in  cases  of 
this  sort  that  a  judge  should  be  conscious  of  his  logic, 
a  matter  in  which  it  is  hoped  this  book  may  be  found 
of  some  use.  While  it  is  dissappointing  to  find  so 
much  undefined  in  these  Acts,  it  is  a  matter  of  con- 
gratulation to  see  that  they  have  made  a  great  step 
forward  in  putting  big  business  under  the  public  law 
and  under  the  direction  of  public  experts,  which  means 
that  the  purpose  of  these  Acts  and  the  purpose  of  this 
book  grew  out  of  common  objective  conditions. 

I  gratefully  acknowledge  my  indebtedness  to  Pro- 
fessor Tufts  who  read  the  manuscript  a  number  of 
times  and  oflfered  many  helpful  criticisims  and  sug- 
gestions; to  Professors  Geo.  H.  Mead,  E.  S.  Ames, 
R.  F.  Hoxie,  T.  C.  Marshall,  and  C.  W.  Wright,  — all 
of  whom  gave  the  manuscript  a  critical  reading;  and 
to  Anna  Dale  C.  Reed,  who  kindly  did  the  typing  and 
proofreading. 

H.  B.  R. 

Moscow,  Idaho,  March,  1916. 


CONTENTS 

Chapter  I.    Introductory 1 

Chapter  II.  The  Change  from  Private  to  Public 
Morals  with  Carriers 

Section  1.  The  Effect  of  Private  Bargaining  between 
Rai'roads  and  shippers 12 

Seclion2.     Judicial  Opinion  upon  Rate  Discrimination..       38 
Section  3.     How  the  Courts  Developed  a  New  Principle 

for  Testing  the  Fairness  of  Railroad  Rates 51 

Section  4.     How  the  Courts  Determined  a  Fair  Profit.  ..       69 
Section  5.     Factors  Determining  the  Development  of 
Judicial  Opinions  upon  Rate  Charges  and  the  Rela- 
tion  of   these   Opinions   to   the    Carging-what-the- 
traflSc-will-bear  and  Cost-of-service  Principles 71 

Ch.vpter  III.  The  Change  from  Private  to  Public 
Morals  with  Large  Industrial  Combinations 

Section  1.  The  Effect  of  the  Adoption  of  the  Methods 
and  Practices  of  Private  and  Competitive  Business 
by  Large  Industrial  Corporations 75 

Section  2.  A  Review  and  Criticism  of  Judicial  Opinion 
upon  the  Morals  of  Monopoly  and  Competition 92 

Chapter  IV.    The   Change   from  Private   to   Public 
Service  IMethods  in  Determining  Price.s 
Section  1.     The  Principle  for  Determining  a  Fair  Price 

under  Competition 125 

Summary 141 


CHAPTER  I 

Introductory 

That  a  change  in  business  practices  and  morals  is 
taking  place,  is  evident  from  the  opinions  of  judges, 
legislators,  and  business  men  aUke.  For  example, 
President  Havemeyer  of  the  American  Sugar  Refining 
Company  stated  well  the  old  competitive  morality  in 
his  testimony  before  the  Industrial  Commission  in  1900. 
He  was  asked  whether  it  was  a  fair  ethical  proposition 
to  make  consumers  pay  dividends  on  an  over-capitali- 
zation of  $25,000,000.  He  answers:  "I  think  it  is  fair 
to  get  out  of  the  consumer  all  you  can,  consistent  with 
the  business  proposition.  ...  I  do  not  care  two  cents 
for  your  ethics.  I  do  not  know  enough  of  them  to 
apply  them.  ...  If  you  get  too  much  of  a  profit,  you 
get  somebody  in  competition."^ 

In  1889,  Andrew  Carnegie  wrote  in  a  similar  style: 
"  It  is  not  in  the  power  of  man  to  exact  for  more  than  a 
brief  season,  indeed,  unusual  profit  upon  capital  inves- 
ted, either  in  transportation  or  manufacture,  so  long  as 
all  are  free  to  compete,  and  this  freedom,  it  may  safely 
be  asserted,  the  American  people  are  not  likely  to 
restrict."^  But  before  the  congressional  committee 
investigating  the  United  States  Steel  Corporation,  he 
presented  a  statement  that  shows  a  decided  change  of 
opinion:  "Your  task,"  he  says,  "arises  from  the  fact 
that  the  law  of  competition  in  business,  which  pre- 
vailed generally  and  operated  with  tolerable  efl5ciency, 

'  Report  of  Industrial  Commission,  Vol.  I,  p.  118. 
-  North  American  Review,  Feb.,  1889. 


2  MONOPOLY  AND  COMPETITION 

has  seemed  recently  to  be  impaired  in  certain  fields, 

notably   those   of   oil,    steel,   and   tobacco I 

assume  that  it  may  be  laid  down  as  an  axiom  that 
where  practical  monopoly  exists  through  combination 
in  any  industrial  field  or  in  any  natural  product,  regu- 
lation under  law  must  follow  to  avert  the  grave  danger 
of  extortion  from  the  consumer  .  .  .  search  the  civi- 
lized world  around,  we  find  the  invariable  rule  that  a 
judge  personally  interested  in  the  slightest  degree  in  a 
cause  is  thereby  debarred  from  sitting  in  judgment  upon 
it.  .  .  .  Producers,  from  the  nature  of  the  case,  are 
thus  debarred  from  sitting  in  judgment.  Nor  can  their 
representations  of  desire  to  obtain  only  "fair  prices" 
and  "no  monopoly"  be  accepted  as  conclusive  .  .  . 
there  should  promptly  be  created  an  industrial  court, 
molded  after  the  Interstate  Commerce  Commission, 
charged  with  all  questions  connected  with  manufacture 
and  natural  products.  ...  Its  province  should  be  to 
examine  all  details,  ascertain  cost  of  production,  adding 
to  such  as  in  its  judgment  will  yield  a  fair  or  liberal 
return  upon  capital  when  skillfully  invested  and  pro- 
perly managed;  the  maximum  selling  price  to  be  fixed 
by  the  court,  based  upon  the  average  cost  price  of 
product  in  up-to-date,  well  managed  works. "^ 

Here  then  we  have  an  example  showing  very  clearly 
that  the  autonomous  justice  of  the  old-fashioned  com- 
petitive system  no  more  applies  to  conditions  of  mono- 
poly, which  require  regulation  by  the  government. 
Beside  Mr.  Carnegie,  many  others  expressed  similar 

3  Hearings,  Jan.  10,  1912,  pp.  2346-47. 


CHAPTER  ONE  O 

views,  notably  Judge  Gary  and  Mr.  Perkins  of  the 
United  States  Steel  Corporation. 

What  has  brought  about  this  change  of  opinion?  It 
was  the  logic  of  the  competitive  principles  themselves. 
Under  the  competitive  system,  a  trader  was  under  no 
obligation  to  treat  all  alike.  He  could  sell  at  any 
price  he  could  get — could  either  give  his  goods  away  or 
charge  as  many  different  prices  as  he  pleased.  He 
could  give  rebates  whenever  and  to  whomever  he 
pleased,  or  cut  prices  to  any  extent  on  his  competitor, 
and  even  untruthfully  praise  the  merits  of  his  own 
goods.  The  system  was  not  so  bad  as  applied  to  indi- 
vidual traders  since  they  were  all  about  equal  in 
strength,  and  it  was  a  game  therefore  which  two  could 
play,  one  man's  error  being  corrected  by  another.  The 
system  worked  badly,  however,  when  too  many  traders 
engaged  in  one  industry,  causing  competition  to  be  so 
sharp  that  hardly  any  could  make  satisfactory  headway. 
The  trader  remedied  this  evil  by  combination.  The 
combination,  as  well  as  the  courts,  took  it  for  granted 
that  whatever  an  individual  could  lawfully  do  a 
combination  of  individuals  might  lawfully  do.  The 
combination  therefore  carried  on  the  same  methods  and 
practices  as  the  competitive  individual  traders.  Be- 
cause of  his  small  capital,  the  individual  could  not 
meet  the  rebates  and  the  cut-prices  of  the  combination, 
no  matter  how  good  a  manager  or  producer  he  was. 
The  autonomous  corrective  of  competition  was  lost, 
resulting  in  a  monopoly  to  the  combination  which 
exploited  both  the  individual  trader  and  the  consumer. 
After  the  damage  was  done,  people  began  to  see  the 


4  MONOPOLY  AJJD  COMPETITION 

wrong  of  the  combination's  doing  business  in  the  same 
way  as  the  competitive  individual  trader.  But  it  took 
a  long  time  to  see  the  wrong,  and  a  still  longer  time  to 
remedy  it.  The  evil  of  rebates,  for  example,  was 
pointed  out  very  fully  by  the  oil  producers  as  early  as 
1872.  The  railroads  also  understood  it,  for  in  that 
year  the  trunk  lines  made  an  agreement  with  the  Pro- 
ducers' Union  to  treat  all  equally  and  not  give  one 
shipper  the  sUghtest  advantage  over  another.  The  fol- 
lowing year,  Beasley,  C.  J.,  in  a  well  reasoned  case* 
pointed  out  the  evils  and  results  of  rebates  as  clearly 
as  they  have  ever  been  pointed  out.  The  public  as  a 
whole,  however,  did  not  understand  it,  and  it  required 
twenty  years  to  get  a  law  passed  condemning  rebates, 
and  twenty  years  more  to  put  it  in  force.  The  problem 
of  railroad  rebates  has  now  been  fairly  solved  through 
the  action  of  the  Interstate  Commerce  Commission. 
But  the  public  is  not  yet  convinced  that  the  industrial 
problem  requires  a  similar  solution. 

There  are  many  reasons  why  the  public  and  the 
government  were  so  slow  in  recognizing  and  remedying 
the  evils  of  rebates  and  other  competitive  practices 
considered  bad.  When  the  industrial  revolution  began 
in  the  United  States,  after  the  Civil  War,  there  was  a 
vast  new  country  rich  in  possible  wealth  to  be  devel- 
oped, and  people  had  to  get  things  done,  no  matter  how. 
They  were  interested  in  results — railroads,  factories, 
and  steamboats — and  in  means  only  so  far  as  they 
produced  the  desired  results.  They  wanted  promoters 
rather  than  preachers.    They  had  no  time  to  reflect 

*  Messenger  et  al  v.  Pennsylvania  R.  R.  Co.,  36  N.  J.,  407. 


CHAPTER  ONE  5 

over  the  ethical  character  of  the  means  nor  to  recon- 
struct their  acquired  habits  to  satisfactorily  meet  the 
changing  conditions.  The  age  was  absorbed  in  econo- 
mic development,  while  the  ethical  lagged  behind. 
For  example,  when  the  Union  Pacific  line  was  completed 
across  the  western  continent,  Bancroft  says:  "The  last 
tie  .  .  .  was  placed  beneath  the  connecting  ends  of 
the  rails,  and  a  spike  of  gold,  placed  in  a  cavity  to 
receive  it,  was  driven  home  by  a  silver  hammer  in  the 
hands  of  President  Stanford  of  the  Central  Pacific. 
.  .  .  Congratulatory  telegrams  were  read  from  cities 
east  and  west  .  .  .  cheers,  music,  and  banqueting  fol- 
lowed, and  the  royal  marriage  was  consumated.  .  .  . 
Thus  ended  in  fulfillment  the  long  dream  of  nearly  forty 
years,  a  fulfillment  that  was  celebrated  in  every  city 
of  the  North  and  many  of  the  South  with  enthusiasm."^ 
The  moral  judgment  of  the  public  did  not  change  until 
four  years  afterwards,  when  some  began  to  complain 
of  its  methods  of  construction  and  instituted  a  Con- 
gressional investigation.  Wlien  the  evidence  was 
revealed,  the  construction  company,  the  Credit  Mo- 
bilier,  was  marked  "the  King  of  Frauds"  and  two 
members  of  Congress,  Oakes  Ames  and  James  Brooks, 
promoters  of  the  railway  who  distributed  some  stock 
among  Congressmen  for  securing  "friends"  and  favor- 
able legislation,  were  dismissed  from  Congress,  thus 
appeasing  public  clamor  by  making  the  two  most  con- 
venient victims  scapegoats  of  the  entire  affair.  Both 
men  were  undoubtedly  unaware  of  having  employed 
questionable  methods,  as  they  were  building  a  railroad 

»  Works,  Vol.  24,  p.  575. 


6  MONOPOLY  AND  COMPETITION 

just  as  other  men  would  build  it,  and  adopting  such 
means  as  would  bring  success  under  the  existing  con- 
ditions. 

The  Union  Pacific  incident  furnishes  a  typical  exam- 
ple of  the  way  in  which  morals  and  law  lagged  behind 
the  industrial  development.  This  lagging  was  aggrava- 
ted on  the  one  hand  by  the  general  demoralization  from 
the  Civil  War,  and  on  the  other,  by  the  laissez  faire 
policy  of  the  government  necessitated  in  part  by  the 
period  of  Reconstruction  that  followed  the  war.  The 
period  during  and  after  the  Civil  War  was  not  noted 
for  its  high  business  morals.  Traders  had  to  turn  the 
fortunes  of  war  to  their  enrichment.  In  one  case, 
5,000  rifles  in  the  New  York  Armory,  condemned  by  the 
army  officers,  were  bought  from  the  government  at 
$3.50  apiece  and  sold  to  Gen.  Fremont^  in  St.  Louis 
for  "new"  and  "government  standard"  at  $22.00 
apiece.  A  quotation  from  The  Book  of  Daniel  Drew 
will  give  the  moral  setting  of  the  time.  "I  saw  very 
quickly,"  says  Drew,  "that  the  War  of  the  Rebellion 
was  a  money  maker  for  me.  Along  with  ordinary 
happenings,  we  fellows  in  Wall  Street  now  had  in  addi- 
tion the  fortunes  of  war  to  speckilate  about  and  that 
always  makes  great  doings  on  a  stock  exchange.  .  .  . 
As  I  look  back  now,  I  see  that  I  never  made  more 
money,  or  had  four  years  that  were  in  all  respects  more 
genuinely  prosperous.  .  .  .  We  financial  men  organ- 
ized a  way  of  getting  early  news  from  the  seat  of  war. 
A  silver  key  will  open  any  lock.  We  had  on  our  pay 
roll,  sutlers,  reporters,  private  soldiers,  and  officers  even 

•  Rep.  of  Committees,  37th  Congress,  2nd  Sess.,  Vol.  II,  p.  LXVII* 


CHAPTER  ONE  / 

up  to  generals.  .  .  .  Big  olTicials  who  wouldn't  accept 
money  could  usually  be  reached  by  giving  them  some 
shares  in  the  stock  we  were  manipulating.  (We  didn't 
dare  make  offers  of  this  kind  to  Abe  himself.  Lincoln 
was  an  impractical  man,  so  far  as  money  making  went. 
All  he  thought  about  was  to  save  the  Union.  .  .  .) 
During  these  days  of  the  War,  we  who  were  on  the 
inside  could  call  the  turn  of  a  stock  long  before  the 
general  public.  This  made  very  profitable  business. 
In  fact,  I  got  to  taking  a  great  deal  of  interest  in  the 
Boys  in  Blue.  .  .  .  When  Richmond  was  finally 
taken,  I  for  one  was  sorry  to  have  the  War  come  to 
an  end."^  It  is  significant  that  many  of  our  late  and 
present  masters  of  industry  and  finance  were  young 
men  receiving  their  education  in  this  situation  de- 
scribed by  Drew. 

The  laissez  faire  policy  was  scarcely  a  less  hindrance 
to  morals  and  legal  development  than  the  condition 
described  by  Drew.  Although  the  period  of  Recon- 
struction made  it  impossible  for  the  government  to 
superintend  business,  yet  this  period  was  over  before 
the  industrial  problem  became  serious.  The  Sherman 
Act  was  passed  in  1890,  indicating  that  Congress  per- 
ceived the  error  of  the  laissez  faire  policy  and  now 
demanded  governmental  action.  But  the  Supreme 
Court  was  not  yet  converted.  Four  years  later,  when 
the  Attorney  General  brought  suit  for  dissolving  the 
American  Sugar  Refining  Company,  Chief  Justice 
Fuller  said:  "It  is  vital  that  the  independence  of  the 
commercial  power  and  of  the  police  power,  and  the 
'  Book  of  Daniel  Drew,  edited  by  B.  W.  White,  pp.  160-162. 


8  MONOPOLY  AND  COMPETITION 

delimitation  between  them  .  .  .  should  always  be 
recognized  .  .  .;  and  acknowledged  evils,  however 
grave  and  urgent  they  may  appear  to  be,  had  better  be 
borne  than  the  risk  be  run,  in  the  effort  to  suppress 
them,  of  more  serious  consequences  by  resort  to  expe- 
dients of  even  doubtful  consitutionality."^  Under 
such  an  opinion,  industrial  combinations  had  nothing 
to  fear,  and  it  was  not  until  the  Addyston  Pipe  &  Steel 
Company  case,  tried  five  years  later,  that  a  change  of 
attitude  was  evident.  "We  conclude,"  Justice  Peck- 
ham  said,  "that  the  plain  language  of  the  grant  to 
Congress  of  power  to  regulate  commerce  among  the 
several  states  includes  power  to  legislate  upon  the  sub- 
ject of  those  contracts  in  respect  to  interstate  or  foreign 
commerce  which  directly  affect  and  regulate  that  com- 
merce, and  we  can  find  no  reasonable  ground  for 
asserting  that  the  constitutional  provision  as  to  the 
liberty  of  the  individual  limits  the  extent  of  that  power 
as  claimed  by  the  appellants."^  With  this  decision 
the  much  prolonged  policy  of  laissez  faire  had  its 
natural  death.  Wliether  this  opinion  was  delivered 
too  late  to  remedy  the  evils  for  which  it  was  intended 
is  not  yet  determined.  But  it  cannot  be  denied  that 
laissez  faire  greatly  hindered  the  legal  development 
from  keeping  pace  with  the  economic. 

Considering  then  the  absorbent  interest  created  in 
economic  affairs  by  the  rapid  industrial  development, 
the  lax  morals  resulting  from  the  Civil  War,  and  the 
laissez  faire  poUcy  of  the  government,  it  is  no  wonder 

»  United  States  v.  E.  C.  Knight  Co.,  156  U.  S.,  1,  13. 
9  175U.  S.,  211,  235. 


CHAPTER  ONE  V 

that  ethical  evolution  did  not  develop  equally  with  the 
economic,  and  that  the  old  morals  of  individual  compe- 
tition were  applied  without  question  to  conditions  of 
combination.  It  is  this  unequal  evolution^''  between 
the  spheres  of  morals  and  industry  that  accounts  for 
the  serious  problem  existing  to-day  in  the  world  of 
business. 

This  evolution  is  now  taking  place  in  the  business 
world,  and  one  of  the  outstanding  features  of  this 
evolution  is  the  change  from  private  and  competitive 
morality  to  public  and  cooperative  morality.  To 
understand  the  character  of  this  change  at  least  three 
things  are  necessary.  First  we  must  know  why  private 
and  competitive  morality  in  big  business  fails  to  satisfy 
the  modern  public.  We  must  understand  what  results 
that  morality  has  produced  which  the  public  has  pro- 
nounced bad  and  for  which  it  demands  a  remedy. 
Second,  we  must  know  something  of  the  solutions  that 
have  been  proposed  to  remedy  these  so-called  evils. 
And  third,  we  must  submit  these  to  a  critical  analysis, 
and  develop  such  new  principles  as  seem  to  be  required 
by  a  fresh  analysis  of  changing  conditions. 

The  change  from  private  to  public  morals  in  business 
first  began  with  the  railroads.  In  the  early  days  of  the 
railroads,  private  bargains  between  shipper  and  carrier 
were  no  more  thought  of  than  a  private  deal  between  a 
consumer  and  a  shoemaker.  But  after  a  time  it  was 
discovered  that  the  favored  shipper  was  getting  an 

"  See  Morals  in  Modern  Business,  Page  Lecture  Series,  Yale 
University,  Chapter  on  Morals  of  Trade  in  the  Making,  E.  D.  Page, 
1909  p.  10-12. 


10  MONOPOLY  AND  COMPETITION 

unusual  advantage,  and  then  a  cry  was  raised  against 
rebates,  a  practice  which  it  took  forty  years  to  eUminate. 
But  the  result  was  that  the  railroads  were  brought 
under  the  public  law  and  then  the  courts  had  the 
obligation  of  developing  a  principle  by  which  they 
might  determine  the  fairness  of  the  rate  charges  of 
these  public  carriers,  a  task  which  was  much  more 
difficult  than  the  elimination  of  rebates.  Now,  the 
legal  development  by  which  the  railroads  were  changed 
from  private  to  public  law  is  one  of  the  interesting 
chapters  in  the  evolution  of  morals,  and  it  is  just  as 
intricate  as  it  is  interesting.  But  it  is  not  only  inter- 
esting from  the  standpoint  of  evolution  but  from  a 
practical  standpoint  as  well,  for  the  change  from  private 
to  public  law  in  case  of  our  large  industrial  corporations 
is  bound  to  take  the  same  course.  The  history  of  the 
change  from  private  to  public  law  in  the  case  of  carriers 
therefore  provides  the  best  suggestion  for  the  solution 
of  our  modern  industrial  problem. 

It  shall  be  the  purpose  of  this  essay  to  trace  this 
development  in  the  case  of  carriers,  and  then  to  take  a 
similar  task  in  connection  with  large  industrial  cor- 
porations in  so  far  as  this  is  possible  under  present 
conditions.  In  general,  our  mode  of  treatment  will  be 
to  describe,  first  the  results  produced  by  the  practice  of 
private  morality  between  carriers  and  shippers;  second, 
to  describe  the  solution  proposed  for  these  practices 
(and  these  will  be  taken  from  the  court  decisions  for  it 
was  in  the  courts  that  the  problem  was  fought  out); 
and  third,  to  set  forth  through  a  criticism  of  these 
court  decisions  the  new  principles  that  were  developed 


CHAPTER  ONE  11 

for  the  purpose  of  meeting  the  conditions  of  modern 
society.  Having  finished  with  the  carriers,  we  shall 
take  up  a  similar  mode  of  treatment  for  large  industrial 
corporations.  Those  interested  only  in  the  conclusions 
reached  may  turn  to  the  summary  at  the  end  of  the 
essay. 


CHAPTER  II 

The  Change  from  Private  to  Public  Morals  with 

Carriers 

In  the  previous  chapter,  I  indicated  that  my  general 
plan  would  be  to  describe  concretely  the  results  of 
applying  the  methods  of  private  and  competitive 
business  to  pubUc  and  monopolistic  business,  or,  in 
other  words,  the  results  of  applying  the  methods  of 
individual  traders  in  competition  to  conditions  of  com- 
bination, then  to  review  judicial  opinion  upon  the 
justness  of  such  an  application,  and  finally,  by  critical 
examination  to  interpret  and  justify  the  new  principles 
required  by  conditions  of  monopoly  and  combination, 
the  business  of  which  is  public  in  character. 

In  this  chapter  I  shall  describe  the  effect  upon 
shippers  when  railroads  base  their  rates  upon  the  com- 
petitive principle  of  charging  what  the  trafl&c  will  bear. 
Then  I  shall  review  judicial  opinion  upon  rate  dis- 
crimination, and,  finally,  I  shall  show  how  the  charac- 
ter of  the  railroad  business  demanded  the  cost-of- 
service  principle. 

Section  I.  The  Effect  of  Private  Bargaining  between 
Railroads  and  Shippers. 

Charging  what  the  traffic  will  bear  generally  means  a 
special  rate  between  the  railroad  and  the  individual 
shipper.  If  the  shipper  is  small  and  has  not  the 
advantage  of  competition,  his  traffic  will  bear  a  high 
rate.     If  the  shipper  is  large  and  has  the  advantage 


CHAPTER  TWO  13 

of  competition,  his  traffic  will  not  bear  a  high  rate. 
In  the  past,  this  generally  meant  that  the  carrier  gave 
the  large  shipper  a  rebate  in  order  to  get  his  business; 
or,  if  he  did  not  give  a  rebate,  he  made  some  other  sort 
of  discrimination.     It  is  necessary  to  see  that  charging 
what  the  traffic  will  bear  is  a  principle  allowing  such 
discrimination  between  individual  shippers.     To  under- 
stand the  working  of  such  a  principle  in  the  railroad 
business,  it  is    necessary  only  to  describe  what   rate 
discriminations  have  meant  to  the  favored  shipper. 
The  history  of  the  American  Sugar  Refining  Company, 
or  of  the  Chicago  packing  houses,  or  of  the  Carnegie 
Steel  Company,  would  all  furnish  examples,  but  the 
best   illustration   is  supplied  by   the  history    of    the 
Standard  Oil  Company  because  it  has  had  the  benefit  of 
many  investigations  and  the  sources  for  materials  are 
therefore  numerous  and  easily  accessible.     They  are 
also  of  a  character  to  supply  sufficient  data  for  drawing 
conclusions.     For  these  reasons,  I  shall  describe  briefly 
what  rebates  have  meant  to  the  Standard  Oil  Company 
and    to    its    competitors.     Although    knowledge    of 
Standard  rebates  is  more  or  less  common,  yet  their 
exact    and   precise   effects   have    never    been    clearly 
depicted,  and  such  a  task  is  necessary  in  order  to 
supply  a  background  for  our  discussion. 

By  way  of  preface,  I  may  state  that  the  Standard 
owed  its  monopoly  not  to  the  fact  that  it  could  manu- 
facture oil  more  cheaply  than  its  competitors,  nor  to 
the  fact  that  it  was  satisfied  with  smaller  profits,  but 
principally  to  the  fact  that  it  received  special  privileges 


14  MONOPOLY  AND  COMPETITION 

in  transportation.    How  it  accomplished  this  I  wOl 
describe. 

Rebates  aided  the  progress  of  the  Standard  Oil 
Company  from  the  beginning,  in  1870.  In  that  year, 
the  Lake  Shore  road  granted  it  a  special  rate  of  $1.30 
a  barrel  from  Cleveland  to  New  York,  the  regular  rate 
being  at  that  time  $2.00^  John  D.  Rockefeller  testi- 
fied before  the  United  States  Industrial  Commission  in 
1899  that,  at  this  early  period,  it  was  customary  for 
each  shipper  to  make  his  own  special  bargains  with  the 
railroads.  The  Standard  being  a  large  shipper  and 
having  the  opportunity  of  playing  competing  railroads 
against  each  other,  as  well  as  having  a  cheap  water 
route,  naturally  made  good  bargains.^  In  this  period, 
there  were  drawn  up  the  most  remarkable  rebating 
contracts  in  history,  the  South  Improvement  Company 
contracts  of  1872.  The  South  Improvement  Company 
purported  to  represent  two-thirds^-^  of  the  refining 
capacity  of  the  United  States  at  that  time,  and  in  its 
stock  the  directors  of  the  Standard  Oil  Company  held 
the  largest  interest.  In  order  to  further  the  develop- 
ment of  the  oil  business,  this  company  concluded  identi- 
cal, but  separate,  contracts  with  the  Pennsylvania,  the 
New  York  Central,  and  the  Erie  railroads,  for  the 
transportation  of  oil.  The  roads  agreed  to  haul  crude 
oil  from  the  oil  regions  in  western  Pennsylvania  to 

*  Tarbell,  History  of  the  Statidard  Oil  Co.,  Vol.  I,  p.  278. 

^  Ibid.,  Vol.  I,  p.  795. 

'^Standard  Oil  Co.  v.  U.  S.,  Emery,  Record,  Vol.  6,  p.  2623. 
(Hereafter  referred  to  as  Record  6/2623. 

*  Record,  Petition,  1  /4. 


CHAPTER  TWO  IS 

either  Cleveland  or  Pittsburg  for  80  cents  a  barrel 
and  a  rebate  of  40  cents,  to  New  York  for  S2.56,  and  to 
Philadelphia  and  Baltimore  for  $2.41  a  barrel,  with  a 
rebate  of  sS1.06  a  barrel  to  each  point.  Refined  oil 
they  agreed  to  haul  from  Cleveland  or  Pittsburgh  to 
New  York  for  $2.00,  and  to  Philadelphia  or  Baltimore 
for  SI -85  a  barrel,  with  a  rebate  of  50  cents  a  barrel 
to  each  point.  From  the  oil  regions  to  New  York  the 
rate  was  vS2.92,  and  to  Philadelphia  it  was  $2.77  a 
barrel,  with  a  rebate  of  $1.32  a  barrel  to  each  point. 
The  rebates  were  to  be  paid  to  the  South  Improvement 
Company  alone  and  all  others  were  to  pay  the  regular 
tariff.  If  any  one  else  should  be  charged  a  less  rate 
than  the  regular  tariff,  the  rate  to  the  South  Improve- 
ment Company  was  to  be  reduced  an  equal  amount. 
Moreover,  the  rebates  were  to  be  paid  not  only  on  the 
South  Improvement  Company's  shipments  but  on  all 
oil  shipments  from  whatever  source.  So  if  the  inde- 
pendent in  Oil  City  shipped  a  consignment  of  refined 
oil  to  Philadelphia,  he  had  to  pay  $2.77  a  barrel  to  the 
railroad  and  the  latter  paid  $1.32  of  this  sum  to  the 
South  Improvement  Company.  The  contracts  further 
provided  that,  "the  party  hereto  of  the  second  part 
shall  maintain  the  business  of  the  party  hereto  of  the 
first  part  against  loss  or  injury  by  competition,  to  the 
end  that  the  party  hereto  of  the  first  part  may  keep 
up  a  remunerative  and  so  a  full  and  regular  business, 
and  to  that  end  shall  lower  or  raise  the  gross  rates  of 
transportation  over  its  railroads  and  connections.  .  .  . 
for  such  times  and  to  such  extent  as  may  be  necessary 
to  overcome  such  competition,  the  rebates  and  draw- 


16  MONOPOLY  AND  COMPETITION 

backs  to  the  party  of  the  first  part  to  be  varied  pari 
passu  with  the  gross  rates."  "Party  hereto  of  the 
second  part"  was  the  railroad  and  "party  hereto  of  the 
first  part"  was  the  South  Improvement  Company. 

It  is  important  to  keep  this  clause  vividly  in  mind,* 
not  because  of  its  importance  to  the  South  Improvement 
Company,  which  was  quite  a  transitory  concern,  but 
because  it  gives  a  hint  of  the  secret  of  the  later  success 
of  the  Standard  Oil  Company,  which  soon  became 
"party  hereto  of  the  first  part"  while  the  railroads  con- 
tinued to  be  "party  of  the  second  part"  and  carried 
out  the  agreement  to  all  practical  purposes. 

After  the  above  contracts  were  concluded,  the  ofl&cers 
of  the  Standard  Oil  Company  at  once  proceeded  to 
make  use  of  them.  They  went  around  to  the  inde- 
pendents in  Cleveland  in  an  effort  to  buy  them  out, 
using  this  forceful  argument:  "If  you  don't  sell  your 
property  to  us,  it  will  be  valueless  for  we  have  gotten 
advantages  with  the  railroads."^  After  presenting  the 
contracts  showing  the  "advantages,"  they  were  able 
to  buy  out  25  of  the  thirty  independents  in  Cleveland 
at  that  time.  These  purchases  increased  the  refining 
capacity  of  the  Standard  from  600  to  10,000  or  12,000 
barrels  per  day,  making  it  by  far  the  largest  refining 
company  in  the  United  States.  The  Standard  could 
now  supply  a  large  enough  freight  traffic  to  be  able  to 
make  its  own  terms  with  the  railroads,  and  from  this 
time  on  its  interest  and  that  of  the  railroads  became 

*  See  Record  A /Exhibit  2,  for  copy  of  contract. 

*  F.  Rockefeller,  Rep.  of  U.  S.  Industrial  Commission,  Vol.  I, 
p.  64.     Hereafter  referred  to  as  R.  I.  C,  64. 


CHAPTER  TWO  17 

identical.  This  was  the  benefit  the  Standard  derived 
from  the  rebating  contracts  made  by  the  South  Im- 
provement Company  with  the  railroads. 

As  soon  as  the  terms  of  the  contract  became  public, 
it  raised  such  enormous  opposition  among  all  oil  pro- 
ducers that  they  speedily  compelled  its  cancellation. 
Besides,  they  organized  a  Producers'  Union  which,  on 
March  25,  1872,  concluded  a  more  favorable  contract 
for  rates  with  the  railroads.  This  contract  provided 
that  all  shipping  of  oil  should  be  made  on  a  basis  of 
perfect  equality  to  all  shippers,  producers,  and  refiners, 
and  that  no  rebates,  drawbacks,  or  other  arrangements 
of  any  kind  should  be  made  or  allowed  that  would 
give  any  party  the  slightest  advantage  in  rates,  or  dis- 
crimination of  any  character  whatever.^  This  was  a 
praiseworthy  standard  indeed,  but  it  proved  altogether 
too  high  for  many  of  the  interested  parties;^  for,  in 
less  than  two  weeks  afterwards,  the  New  York  Central 
again  paid  rebates  to  the  Standard  Oil  Company  on  its 
eastbound  shipments,  a  rebate  of  25  cents  at  first  but, 
later,  it  was  increased  to  45  cents  because  of  the  compe- 
tition of  the  Pennsylvania.  The  railroads  did  not 
keep  this  agreement  because  to  do  so  would  have  meant 
a  loss  of  much  of  their  accustomed  traffic.^  They 
had  agreed  to  make  the  rates  on  oil  equal  to  all  refiners, 
whether  in  the  oil  regions  or  in  Pittsburgh  or  in  Cleve- 
land, the  rate  being  SI. 50  a  barrel  to  New  York  and 
$1.35  to  Philadelphia  or  Baltimore.    This  seems  gen- 

'  1  R.  I.  C,  640. 

*Ibid. 

"  Railroad  Investigation,  1879,  New  York,  Blanchard,  p.  3393. 


18  MONOPOLY  AND  COMPETITION 

erous  to  Cleveland  and  Pittsburgh,  since  both  points 
were  a  considerable  distance  farther  from  the  seaboard 
than  the  oil  regions  were.  But  the  refiners  in  Cleve- 
land and  Pittsburgh  had  to  pay  50  cents  a  barrel  to 
get  their  crude  oil  from  the  wells.  The  refiners  at  the 
wells,  of  course,  were  free  from  this  charge.  Its  pay- 
ment would  have  meant  a  great  loss  to  the  vested 
interests  in  those  cities;  this  the  railroad  wished  to 
avoid,  although  the  arrangement  allowed  each  point 
its  natural  advantages  of  location. 

After  making  use  of  the  South  Improvement  Com- 
pany's contracts,  the  next  important  step  taken  by  the 
Standard  was  to  secure  control  of  the  oil  terminals  at 
New  York  Harbor  belonging  to  the  Erie  and  the  New 
York  Central  railroads.  It  leased  the  Erie  terminal  in 
1874  and,  the  next  year,  entered  into  a  contract  with 
the  New  York  Central  for  constructing  one  for  it.^° 
Each  of  these  contracts  was  renewed  one  year  after  the 
first  signing.  They  authorized  the  Standard  to  make 
terminal  charges  upon  all  oil  shipped  over  these  two 
roads,  but  to  make  them  no  higher  than  those  of  com- 
peting terminals,  which  was  an  equitable  provision, 
but  was  insignificant  since  at  that  time  there  was  but 
one  competing  terminal,  and  that  was  soon  purchased 
by  the  Standard.  The  contract  with  the  Erie  stipu- 
lated in  particular  that  rates  upon  oil  were  to  be  made 
between  the  Standard  and  the  Erie,  contrary  to  the 
usual  custom  of  railroads  making  their  own  rates.  The 
renewed  contracts  openly  allowed  the  Standard  a  re- 

"  Record,  A/Exhibits  4-5. 


CHAPTER  TWO  19 

bate  of  10  per  cent  from  the  regular  rates. ^^  This  was 
given  as  a  compensation  for  its  operating  the  terminal. 
Whether  this  was  a  fair  compensation  is  not  necessary 
to  say.  The  point  is  that  the  rebate,  together  with  the 
privilege  the  Standard  had  of  fixing  the  terminal  charges 
as  it  pleased,  put  it  above  competition.  Besides, 
this  arrangement  put  the  Standard  in  a  position  to 
get  an  exact  knowledge  of  all  the  business  of  its 
competitors  shipping  over  these  roads.  However,  the 
competitors  shipped  very  little  oil.  They  could  not  do 
so  because  of  the  prohibitive  terminal  charges. ^^ 

Because  of  its  control  of  the  Erie  and  New  York 
Central  terminals,  the  Standard  was  well  on  the  way  to 
a  monopoly.  It  required  only  a  few  more  finishing 
touches.  These  were  added  contemporaneously  with 
the  acquirement  of  the  terminals.  One  of  them  was 
the  pool  of  1874,  entered  into  by  the  Pennsylvania, 
New  York  Central,  and  Erie  railroads.  This  pool  did 
away  with  the  charges  for  the  hauling  of  crude  oil 
from  the  wells  to  the  refinery,  as  provided  in  the  agree- 
ment of  1872  with  the  Producers  Union ;  and  it 
charged  all  refiners  the  same,  irrespective  of  location, 
for  having  the  oil  hauled  to  the  seaboard. ^^  The  re- 
finers in  the  oil  regions,  however,  did  not  see  the  equity 
of  this  arrangement  since  they  were  deprived  of  their 

"  But  at  the  same  time  the  Pennsylvania  agreed  to  pay  the 
Standard  a  10%  rebate,  apparently  to  guarantee  it  a  certain 
portion  of  its  business.  Blanchard,  Railroad  Investigation,  p. 
3451. 

"  Emery  Record,  6/2640. 

"  Record,  A/Exhibit  6. 


20  MONOPOLY  AND  COMPETITION 

natural  advantages  of  location;  but  the  refiners  in 
Cleveland  or  Pittsburgh  enjoyed  their  natural  advan- 
tages of  location  for  shipping  and  marketing,  and  could 
secure  acids,  barrels,  and  other  materials  needed  in  re- 
fining oil  much  cheaper  than  the  refiners  in  the  oil  re- 
gions. But  this  agreement  was  much  more  favorable  to 
the  Standard  than  the  competitors  supposed;  for  a  short 
time  previous  to  the  pool,  the  Standard  had  bought  up 
the  leading  refineries  in  Pittsburgh,  Philadelphia,  and 
New  York,  and  now  o\\Tied  90  per  cent  of  the  refining 
capacity  of  the  United  States.^^ 

However  the  offensive  part  in  the  pool  arrangement 
was  a  clause  providing  a  rebate  of  22  cents  a  barrel  to 
all  shippers  who  transported  their  oil  "through  pipes 
the  owners  of  which  maintain  agreed  rates  of  pipage.  "^^ 
The  "owners"  were  the  United  Pipe  Lines  Company, 
owned  by  the  Standard  Oil  Company.  This  rebate 
enabled  the  United  Pipe  Lines  to  pay  the  producers 
that  much  more  for  their  oil  and  so  take  the  trade  away 
from  the  competing  lines.  The  result  was  that  they  in- 
creased their  pipage  from  25  to  80  per  cent  of  the  total 
then  existing,  at  least  12  of  the  20  competitors  having 
been  forced  to  sell  out.^*^ 

This  pool  of  1874  not  only  forced  competitors  out  of 
the  pipe  line  business,  but  it  also  was  equally  disas- 
trous to  independent  refiners.  Emery,  an  importan 
competitor  at  that  time,  said  it  meant  the  destruction 
of  the  entire  independent  interests.     It  shut  down  every 

'^Record,  Petitioners'  Brief,  Vol.  1,  p.  46. 

^  Record,  A/Exhibit  6. 

16  Patterson,  Railroad  Investigation,  p.  1693. 


CHAPTER  TWO  21 

refinery  along  Oil  Creek,  throwing  out  of  employment 
over  400  men  in  the  town  of  Titusville  alone.  Inde- 
pendents in  Pittsburgh  and  Philadelphia  were  also 
either  compelled  to  sell  or  lease  to  the  Standard.'^ 

To  escape  the  prohibitive  tariffs  of  1874,  the  inde- 
pendents who  yet  remained  sought  routes  of  trans- 
portation. "Dr."  Hostetter  built  the  Conduit  Pipe 
Line  from  near  Titusville  to  Pittsburgh,  where  it  made 
connection  with  the  Baltimore  and  Ohio.  This  line  was 
popularly  known  as  "Hostetter's  Bitters  Line,"  be- 
cause, before  the  value  of  crude  oil  for  illuminating 
purposes  became  known,  "Dr."  Hostetter  had  made  a 
considerable  fortune  in  bottling  it  and  selling  it  as  a 
patent  medicine  having  many  wonderful  curative 
powers.  The  pipe  line  had  to  cross  the  line  of  the 
Pennsylvania,  which  was  not  anxious  for  the  competi- 
tion of  the  Baltimore  and  Ohio  and  therefore  did  not 
permit  the  line  to  cross.  Accordingly  "Dr."  Hostetter 
erected  tank  stations  on  each  side  of  the  tracks  and 
carted  the  oil  across.'^ 

A  second  route  chosen  by  the  independents  was  to 
ship  the  oil  down  the  Allegheny  River  in  barges  to  Pitts- 
burgh, thence  down  the  Ohio  to  Huntington,  West 
Virginia,  from  where  it  went  by  rail  to  Richmond,  and 
then  by  ship  to  New  York  or  Europe.^^  Although 
this  route  increased  the  distance  by  several  hundred 
miles,  yet  it  proved  much  cheaper  than  the  tariffs  of 
the  pool  of  1874. 

"  Record,  6/2635,  2726. 
18  Emery,  Record,  6/648. 
"  Cassat,  Record,  20/38. 


22  MONOPOLY  AND  COMPETITION 

By  the  fall  of  1874  the  Standard  Oil  Company  had 
control  of  90  per  cent  of  the  refining  capacity  of  the 
United  States;  yet  some  competitors  were  arising,  the 
most  formidable  of  which  was  the  Empire  Transporta- 
tion Company,  an  ally  of  the  Pennsylvania  Railroad. 
This  company  was  thoroughly  equipped  for  transport- 
ing and  handling  oil.  It  operated  500  miles  of  pipe, 
had  refineries  in  Philadelphia  and  New  York,  and  owned 
an  excellent  terminal  for  handling  oil  at  Communipaw, 
N.  J.,  on  New  York  Harbor.  The  Standard  objected 
to  this  alliance  between  the  Empire  and  the  Pennsyl- 
vania, because,  since  the  Standard  was  primarily  a 
manufacturer  and  not  a  carrier,  it  was  not  fair  for  the 
Pennsylvania,  which  was  a  carrier,  to  engage  in  com- 
petition in  manufacturing.^''  The  New  York  Cen- 
tral and  the  Erie  also  objected  because  if  the  Penn- 
sylvania engaged  in  manufacturing  it  would  discrimi- 
nate in  its  own  favor  and  so  take  their  oil  traffic  away. 
Thus  the  other  roads  could  not  meet  the  competi- 
tion of  the  Pennsylvania  as  a  carrier  and  the  Standard 
could  not  compete  with  it  as  a  manufacturer,  since  the 
Pennsylvania  could  transport  its  oil  at  a  much  less  cost 
and  so  refine  oil  more  cheaply  than  the  Standard. 
From  the  standpoint  of  public  policy  the  objection  of 
the  Standard  had  much  in  its  favor.  If  all  manufac- 
turers entered  the  carrying  business,  there  would  be  an 
excess  of  carriers,  if  all  carriers  entered  manufacturing, 
there  would  be  an  excess  of  manufacturers.  Moreover, 
if  these  functions  were  combined  in  one  company,  that 

20  Record,  Rockefeller,  16/3087;  Cassat,  20,  123;  Archbold, 
6/3252. 


CHAPTER  TWO  23 

company  would  certainly  have  the  upper  hand  over 
those  which  were  carriers  alone  or  manufacturers  alone, 
and  so  have  an  easy  road  to  monopoly.  Therefore,  in 
a  competitive  society,  there  is  every  reason  for  keeping 
the  functions  of  carrier  and  producer  under  separate 
and  independent  control.  The  Standard,  then,  had 
apparently  sound  argument  from  an  economic  point  of 
view,  and  also  from  a  business  standpoint;  since  a 
corporation  having  the  capital  of  the  Pennsylvania,  and 
the  right  of  eminent  domain  in  addition,  might  prove 
an  unpleasant  competitor  indeed  if  allowed  to  con- 
tinue. But  the  political  and  economic  argument  of  the 
Standard  loses  its  weight  when  we  recall  that  at  the 
time  of  its  objection  it  controlled  the  terminals  of  two 
trunk  lines  and  operated  quite  a  number  of  miles  of 
pipe  line.  However,  these  facts  were  not  generally 
known  and  made  no  difference.  The  New  York  Cen- 
tral and  the  Erie  roads  in  conjunction  with  the  Stand- 
ard declared  hostilities  against  the  Empire  and  Penn- 
sylvania in  March,  1887.  The  roads  fought  by  cutting 
rates  and  the  Standard  by  taking  away  every  bit  of  its 
traffic  from  the  Pennsylvania  and  everywhere  under- 
selling the  Empire  in  its  markets.  By  the  following 
October,  the  Pennsylvania  agreed  it  was  primarily  a 
carrier  and  not  a  producer  and  sold  the  Empire  to  the 
Standard,  which  by  this  purchase  acquired  500  more 
miles  of  pipe  line  and  also  the  Pennsylvania  oil  ter- 
minal at  Communipaw.'^  It  had  now  seemingly  for- 
gotten the  unfairness  of  combining  the  functions  of 
carrier  and  manufacturer  in  one  company.     The  Penn- 

^^  Railroad  Investigation,  Patterson,  p.  1995. 


24  MONOPOLY  AND  COMPETITION 

sylvania  having  been  brought  into  line,  the  three  trunk 
Hnes  conspired  to  set  upon  the  Baltimore  and  Ohio. 
The  latter  was  soon  forced  to  come  to  terms,  and  its 
feeder,  the  "Hostetter's  Bitters  Line,"  also  was  turned 
over  to  the  Standard,  which  promptly  put  in  a  con- 
necting pipe  underneath  the  Pennsylvania  tracks. 

The  way  was  now  open  to  a  treaty  of  peace.  There- 
fore, the  four  trunk  lines  arranged  a  pool  in  October  17, 
1877.  The  Pennsylvania  was  to  have  47  per  cent  of 
the  Standard's  business  with  a  minimum  of  two  million 
barrels  a  year;  the  New  York  Central  and  the  Erie  rail 
roads  were  to  have  21  per  cent  each;  and  the  Baltimore 
and  Ohio  11  per  cent.  As  a  reward  to  the  Standard 
for  having  made  this  division  properly,  the  railroads 
agreed  to  pay  it  a  rebate  of  10  per  cent  on  all  its  traffic 
received.^^  Assuming  that  the  Pennsylvania  received 
for  shipment  its  prescribed  quantity  and  the  other  rail- 
roads their  proportionate  amounts,  this  rebate  alone 
yielded  the  Standard  over  $700,000  annually.  This, 
however,  was  but  a  small  part  of  the  rebate  paid  to  the 
Standard  Oil  Company  by  these  roads.  Soon  after  the 
pool  agreement  of  October,  1877,  the  New  York  Central 
entered  into  a  contract  with  the  American  Transfer 
Company,  a  subsidiary  of  the  Standard,  to  pay  it  35 
cents  a  barrel  on  all  oil  shipped  over  its  lines  whether 
consigned  by  the  Standard  or  its  competitors.  The 
Erie  followed  suit,  agreeing  to  rebate  the  American 
Transfer  Company  20  cents  a  barrel  on  all  oil  fron  Brad- 
ford, Pennsylvania  and  30  cents  on  all  other  oil  The 
traffic  manager  of  the  Pennsylvania,  upon  being  shown 

-  Record,  A/Exhibit  7. 


CHAPTER  TWO  25 

the  receipted  bills  of  tlie  rebates  from  the  New  York 
Central  and  the  Erie,  agreed  to  rebate  the  American 
Transfer  Company  20  cents  a  barrel  on  all  shipped 
over  its  lines.  Later  this  was  increased  to  223^  cents.^^ 
In  this  way  the  Standard  was  receiving  rebates  upon 
rebates.  But  by  the  spring  of  1878  certain  inde- 
pendents had  effected  connections  so  that  they  could 
ship  oil  very  cheaply  to  New  York  by  way  of  the 
Erie  Canal.  Now  an  opportunity  presented  itself 
to  the  railroads  to  maintain  the  business  of  the  Stan- 
dard "against  injury  and  loss  by  competition  to  the 
end  that  it  may  have  a  remunerative  and  so  a  full 
and  regular  business."  The  representatives  of  the  four 
trunk  lines  held  a  conference  and  made  an  additional 
increase  to  the  Standard  of  15  cents  a  barrel.  This 
rebate  was  effective  from  May  1,  1878  to  December  8, 
when  the  competition  by  canal  ceased.-"  But  the  10 
per  cent  rebate  and  the  223/2  cent  rebate  were  still  in 
existence  in  March,  1879. 

It  is  now  in  order  to  see  whether  these  rebates  resulted 
in  a  "remunerative  and  so  a  full  and  regular  business" 
to  the  Standard.  They  undoubtedly  did  so,  for  from 
October  17,  1877  to  March  31,  1879  they  amounted  to 
somewhere  between  $3,000,000  and  $10,000,000.-^  The 
lower  amount  even  is  considerable,  for  it  would  pay  a 
return  of  5  per  cent  per  annum  on  a  capitalization  of 

23  Cassat,  Record,  20/17;  A/Exhibit  8. 

'-*  Cassatt,  Record,  20/31. 

^  See  ilcmized  statement  of  these  rel)ates  by  Lewis  Emery 
before  Committee  on  Manufactures,  II.  R.  1st  Session,  50th 
Congress,  1887-1888. 


26  MONOPOLY  AND  COMPETITION 

$60,000,000.  But  the  American  Transfer  Company 
made  a  larger  rate  of  profit  than  this  during  the  year  of 
1878.  It  operated  only  about  75  miles  of  pipe  line  and 
had  a  capitalization  of  $100,000.  Nevertheless,  upon 
this  small  capitalization  its  rebates  from  three  trunk 
lines  yielded  a  profit  of  3093  per  cent.  From  these 
figures,  it  is  evident  that  the  protection  against  loss  and 
injury  by  competition  was  remunerative  and  so  pro- 
duced a  full  and  regular  business."'^ 

But  what  was  the  effect  upon  competition  during 
these  years  of  the  rapid  growth  of  the  Standard  Oil 
Company  from  1872  to  1879,  and  especially  of  the 
rebates  arranged  in  1877?  In  1872  there  were  250  inde- 
pendent oil  refineries  in  the  oil  country  of  Pennsylvania 
alone.  By  1878  not  over  five  independents  remained 
in  the  whole  country.  In  1888  Mr,  Emery  produced  an 
exhibit  which  was  a  "partial  list  of  the  petroleum  refin- 
eries in  Pennsylvania  bankrupted,  squeezed  out, 
bought  up,  leased,  or  dismantled  by  the  great  oil 
monopoly  of  Ohio  and  New  York,  known  as  the 
Standard  Oil  Company."  This  list  named  75  refin- 
eries outside  of  Pittsburg.  Twenty  per  cent  of  these 
were  "squeezed  out"  before  1872,  thkty  "dismantled" 
between  1875  and  1878,  and  17  were  "bought  up." 
"In  Pittsburg,"  the  exhibit  states,  "there  were  58  refin- 
eries in  1877.  Thirty  refineries  have  been  crushed  out 
and  dismantled.  No  record  is  left.  The  remaining  28 
have  been  bought  up  or  leased  by  the  great  monopoly. 

-^  Rice,  1  R.  I.  C,  696,  reporting  F.  B.  Gavens'  argument 
before  the  Committee  on  Manufactures. 


CHAPTER  TWO  27 

.  .  ,    Twelve  of  these  are  shut  down  and  sixteen  only 
are  fitted  for  business."  -^ 

Although  the  freight  rates  from  1877  and  1879  had  a 
disastrous  effect  upon  competitors  of  the  Standard, 
yet,  in  another  respect,  they  brought  great  benefits  to 
the  oil  business.  In  1878  certain  independents  decided 
to  free  themselves  from  their  dependence  on  the  rail- 
roads and  to  provide  a  scheme  of  transportation  with 
which  the  latter  could  not  possibly  compete.  For  this 
purpose,  they  organized  the  Tidewater  Pipe  Company 
and  planned  a  pipe  line  from  the  oil  regions  of  western 
Pennsylvania  to  the  seaboard.  By  June  of  1879  they 
had  completed  the  line  as  far  east  as  Williamsport, 
whence  the  oil  was  carried  by  rail  to  New  York.  The 
Tidewater  now  demonstrated  for  the  first  time  the 
efficacy  of  pipes  for  the  transportation  of  oil  over  long 
distances.  This  innovation  revolutionized  the  oil 
business,  for  it  was  to  reduce  the  cost  of  refining  oil  by 
between  two  and  three  cents  a  gallon.  It  also  was  to 
become  one  of  the  great  bulwarks  of  the  Standard  Oil 
Company.  But  for  the  present,  a  new  competitor 
of  promising  f ormidability  had  arisen ;  wherefore,  there 
was  again  an  opportunity  for  the  railroads  to  maintain 
the  business  of  the  Standard  "against  loss  and  injury 
by  competition  to  the  end  that  it  have  a  remunerative 
and  so  a  full  and  regular  business."  They  called  a 
conference  and  made  the  necessary  reduction  in  rates. 
They  were  generous.  Crude  oil  from  Titusville,  Pitts- 
burgh, etc.,  was  reduced  from  $1.40  to  50  cents  a  barrel, 
and  from  Bradford  to  30  cents.     To  the  Standard  the 

"  II.  R.  First  Sess.  49th  Cong.,  p.  232  fl.,  Vol.  9. 


28  MONOPOLY  AND  COMPETITION 

rates  were  still  less,  20  cents  from  Bradford,  and  30 
cents  from  Cleveland,  Pittsburgh,  etc.  On  August  1, 
these  were  still  further  reduced,  5  cents  upon  the  Brad- 
ford rate  and  10  cents  upon  the  Cleveland  rate.^**  But 
these  reductions,  large  as  they  were,  did  not  put  the 
Tidewater  out  of  business.  Consequently  other  means 
were  used.  Some  men  tried  to  obstruct  the  right  of 
way.  They  bought  up  farms  through  which  the 
right  of  way  passed,  dated  the  deed  back  to  a  date 
previous  to  the  securing  of  the  right  of  way,  and 
then  attempted  to  oust  the  pipe  line.  The  Stan- 
dard undersold  the  Tidewater,  bought  the  refineries 
in  New  York  which  it  had  contracted  to  supply,  and 
purchased  a  minority  interest  in  its  stock.  By  1883, 
the  Tidewater  drew  up  a  compromise  with  the  Stan- 
dard and  divided  the  business.  Since  this  date  the 
two  have  been  in  harmony.-^ 

Other  independents  sought  relief  from  the  rebate 
system  by  appealing  to  the  courts;  and  accordingly 
the  state  of  Pennsylvania  was  persuaded  to  bring  suit 
against  the  Pennsylvania  railroad.  But  these  were 
withdrawn  because  of  a  compromise  in  which  the 
Standard  agreed  among  other  things  "not  to  object 
to  an  entire  abrogation  of  the  system  of  rebates."^'' 
But  although  it  did  not  object  to  their  abrogation, 
neither  did  it  object  to  their  prorogation.     For  ex- 

'^^  Railroad  Investigation,  Welch,  p.  3688;  Blanchard  and  Rut- 
ter,  Exhibits  p.  621. 

23  See  Warren,  Record,  1/191,  192;  Benson,  1/208;  Lombard, 
1/259;  A/Exhibit  13. 

3"  Record,  A/Exhibit  10. 


CHAPTER  TWO  29 

ample,  during  the  years  1879  to  1883  the  Lake  Shore 
road  carried  oil  from  Cleveland  to  points  west  for 
from  10  to  30  cents  less  on  the  barrel  than  for  Sco- 
field,  Teagle  and  Shurmer — a  competing  firm  in  Cleve- 
land.^' The  Cleveland  and  Marietta  Railroad,  in 
1885,  entered  into  an  arrangement  with  tlie  Standard 
parties  by  which  Rice  and  others,  independent  refiners 
in  Marietta,  Ohio,  were  to  pay  35  cents  a  barrel  to 
lave  their  crude  hauled  from  Macksburg  to  Marietta. 
The  Standard  was  to  pay  only  10  cents  a  barrel  for 
the  same  services  and  was  to  receive  in  addition  15 
cents  for  every  barrel  of  oil  shipped  by  Rice  and  other 
independents.^^  Rice,  however,  invoked  the  protection 
of  the  courts  and  secured  the  refund  of  this  overcharge. 
Now  by  1887  the  effects  of  railroad  rebates  and  dis- 
criminations were  becoming  generally  understood,  so 
that  Congress  passed  the  Interstate  Commerce  Act  for- 
bidding such  methods  and  also  creating  the  Interstate 
Commerce  Commission  as  an  agency  to  remedy  them. 
The  Standard  Oil  Company,  anxious  to  abide  by  the 
law,  accepted  very  few  rebates  after  1887.  Instead  of 
going  through  the  cumbersome  process  of  paying  an 
open  rate  of  60  cents  and  then  accepting  a  rebate  of 
20  cents,  it  simply  accepted  a  special  rate  of  40  cents 
straight;  or  instead  of  shipping  its  oil  in  wooden  barrels, 
it  shipped  either  in  iron  barrels  or  in  iron  tank  cars  and 
had  these  containers  entered  in  a  lower  class  of  freight; 

'1  Teagle,  Committee  on  Manufactures,  II.  R.  1st  Sess. 
49th  Cong.,  p.  544. 

'-  Rep.  of  Master  Commissioner  Nash  to  the  Circuit  Co urt, 
Tarbell,  Vol.  2,  p.  348;  Handy  v.  Cleveland  M.  R.  Co.,  31  Fed.,  689. 


30  MONOPOLY  AND  COMPETITION 

or  instead  of  shipping  oil  to  a  distant  point  through  an 
interstate  commerce  route,  it  accomplished  this  by  a 
combination  of  a  series  of  local  state  routes,  a  plan 
which  was  much  cheaper  and  was  beyond  the  juris- 
diction of  the  Interstate  Commerce  Act;  or  where  the 
Standard  refinery  was  located  in  a  town  in  which  there 
was  no  competing  refinery — which  was  the  almost  uni- 
versal rule — the  railroads  made  lower  open  rates  from 
this  point  than  from  competitive  points.  The  result 
was  that  the  Interstate  Commerce  Act  did  not  seriously 
affect  the  progress  of  the  Standard  Oil  Company. 

There  are  abundant  illustrations  of  each  of  these 
evasions  in  the  United  States  Report  on  the  Transpor- 
tation of  Petroleum^^-^^  by  the  Commissioner  of  corpo- 
rations, Mr.  Garfield.  This  report  consists  of  more 
than  500  pages  but  it  does  not  aim  to  give  a  com- 
plete account  of  all  the  discrimination  enjoyed  by 
the  Standard  Oil  Company.  There  is,  however,  suffi- 
cient material  here  for  our  purposes,  i.  e.,  to  make  clear 
the  effect  of  railroad  rebates  and  discriminations. 
According  to  this  report,  through  secret  and  open 
rate  discriminations,  the  Standard  received  about 
$1,500,000  in  1904;  quite  a  sum  indeed,  but  a  consid- 
erable improvement  over  the  year  of  1878.  I  will 
review  a  few  of  the  more  important  ones. 

From  Olean  in  southwestern  New  York,  where  the 
Standard  has  a  refinery,  the  Pennsylvania  in  1904  made 
it  secret  tank  car  rates  of  10  cents  a  barrel  to  Buffalo 
and  9  cents  to  Rochester.     At  the  same  time  the  Erie 

*^  Referred  to  as  G- 
="G.  p.  21. 


CHAPTER  TWO  31 

had  an  open  rate  of  33.6  cents  a  barrel  from  Olean  to 
Rochester.  Independents  around  Olean  had  to  pay 
from  38  to  46  cents  to  Rochester  and  32  cents  to 
Buffalo.^^  The  Standard  used  Rochester  and  Buffalo 
as  general  distributing  points  for  the  state  of  New 
York,  and  from  them  obtained  other  low  secret  rates 
to  various  points  over  the  state.  Thus  it  reached 
most  of  New  York  at  a  decided  advantage  over  com- 
petitors and  consequently  acquired  the  principal  part 
of  the  trade.  These  secret  rates  to  Buffalo  and  Roch- 
ester, as  compared  with  the  open  rates,  netted  the 
Standard  a  direct  gain  of  $121,776  in  1904.3" 

The  Standard  also  enjoyed  unusually  low  rates  from 
Olean  to  points  in  Vermont.  This  is  accomplished  by 
combining  a  series  of  rates.  For  example,  to  the  secret 
rate  of  2.8  cents  per  hundred  pounds  from  Olean  to 
Rochester  it  added  a  secret  local  rate  of  9  cents  granted 
by  the  New  York  Central  from  Rochester  to  Norwood 
in  northern  New  York,  and  to  these  two  it  added  a 
special  tank  car  rate  of  3.54  cents  from  Norwood  to 
Burlington,  Vermont.  In  this  manner  it  reached  Bur- 
lington at  a  rate  of  16.12.  But  independents  from 
Warren,  Pa.,  near  Olean  had  to  pay  33  cents  per  hundred 
pounds  to  Burlington  and  23  to  Rutland.^^  From 
BurUngton  the  Standard  received  other  special  local 
rates  to  various  towns  in  the  state.  These  were  more 
than  9  cents  per  hundred  pounds  less  than  to  com- 
petitors if  the  shipments  were  made  in  less  than  car- 

^  G.  p.  95-100. 
«  G.  p.  97-100. 
"  G.  p.  112. 


32  MONOPOLY  AND  COMPETITION 

loads,  and  over  11  cents  per  hundred  pounds  less  if 
they  were  made  in  car-loads.  By  these  combinations 
of  local  rates,  the  Standard  reached  the  distributing 
centers  of  Vermont  for  a  rate  that  was  from  17  to 
18  cents  less  per  hundred  than  its  competitors,  and  the 
final  destination  beyond  for  from  16  to  29  cents  less.^^ 
The  result  was  that  little  independent  oil  reached  Ver- 
mont. 

If  we  now  turn  our  attention  to  Whiting,  Indiana,  a 
suburb  of  Chicago,  where  the  Standard  has  one  of  its 
largest  refineries,  and  compare  the  oil  rates  from  this 
town  with  those  from  Toledo  where  the  nearest  compe- 
titor is  located,  we  find  a  set  of  rates  analogous  to  those 
from  Olean.  From  the  refinery  in  Whiting  the  Stand- 
ard supplies  the  principal  part  of  the  Mississippi  Val- 
ley, and,  previous  to  1904,  also  supplied  most  of  the 
states  of  the  Southwest.  For  our  purpose  it  is  sufficient 
to  examine  the  rates  to  the  South-Central  and  the 
Southwest  Territories  from  Whiting  and  Toledo. 

The  South-Central  territory  comprises  the  states 
south  of  the  Ohio  and  east  of  the  Mississippi.  All  this 
except  a  part  of  Kentucky,  and  a  strip  along  the  Atlantic 
coast,  the  Standard  supplied  from  Whiting.  It  was 
reached  principally  by  two  secret  rate  combinations 
known  as  the  Grand  Junction  and  the  Evansville  com- 
binations. Both  of  these  existed  about  ten  years 
before  they  became  public.  The  Grand  Junction  com- 
bination led  from  Whiting  to  Grand  Junction,  which 
is  a  small  railway  crossing  in  the  southwestern  corner 
of  Tennessee  and  at  the  extreme  western  corner  of  the 

3«G.  p.  127,128. 


CHAPTER  TWO  33 

South-Central  territory.  From  this  point  the  oil  was 
carried  east  and  south  by  the  Southern  Railway.  The 
Evansville  combination  led  from  Whiting  to  Evansville, 
Indiana,  where  connections  were  made  with  the  south- 
ern roads,  chiefly  the  Louisville  and  Nashville.  The 
route  by  Grand  Junction  was  a  very  circuitous  one  but 
it  meant  an  advantage  over  direct  open  rates  of  from 
31/2  to  29^2  cents  a  hundred,  according  to  the  final 
destination,  and  it  saved  the  Standard  about  $72,000 
a  year.^^  The  Grand  Junction  rates  to  the  points 
in  the  south  were  an  average  of  12.79  cents  per  hun- 
dred pounds  less  than  competitors'  rates  to  the  same 
points  from  Toledo.  The  average  distance  to  ten  rep- 
resentative towns  reached  by  the  Grand  Junction 
rates,  such  as  Birmingham,  Alabama,  or  Chattanooga, 
Tennessee,  or  Spartenburg,  South  Carolina,  is  690 
miles  from  Whiting  by  the  most  direct  route,  but  by 
the  circuitous  route  by  way  of  Grand  Junction  increased 
the  distance  to  993  miles.^*'  Now  the  same  towns  had 
an  average  distance  from  Toledo  of  only  664  miles. 
Thus  a  slight  advantage  in  distance  for  Toledo  meant 
a  great  disadvantage  in  rates. 

The  Evansville  Combination  netted  an  advantage  of 
about  7.86  cents  per  hundred  over  the  competitors' 
rates  from  Toledo  and  saved  the  Standard  $10,963.72 
per  year.^^  The  distance  to  ten  representative  towns 
reached  by  this  combination,  such  as  Nashville,  Ten- 
nessee; BowUng  Green,  Kentucky;  Charlotte,  North 

»» G.  p.  253. 

"  Calculated  from  table,  G.  p.  255. 

«  From  table  G.  p.  284,  287. 


34  MONOPOLY  AND  COMPETITION 

Carolina;  and  Grenada,  ISIississippi,  was  609  miles 
from  Whiting.  From  Toledo  it  was  33  miles  farther. 
Here  a  sHght  disadvantage  in  distance  for  Toledo  meant 
a  great  disadvantage  in  rates. 

To  points  along  the  Gulf  and  the  lower  Mississippi, 
the  railroads  from  Chicago  made  low  open  rates  in  con- 
nection with  the  southern  roads  in  order  to  meet  water 
competition.  The  rates  were  9.5  per  hundred  less  from 
Chicago  and  WTiiting  than  from  Toledo,  largely  because 
the  railroads  from  Toledo  did  not  make  through  con- 
nections to  these  points.^'- 

If  now  we  make  a  comparison  of  the  rates  from 
Whiting  and  Toledo  to  all  the  64  principal  towns  in 
the  South-Central  territory  reached  by  the  Evansville 
and  the  Grand  Junction  Combinations,  and  the  low 
rates  from  Chicago,  we  get  the  following  set  of  facts: 
The  average  rate  from  Whiting  to  these  towns,  i.e., 
38.7  cents  per  hundred  pounds  and  49.1  cents  from 
Toledo — 10.4  cents  in  favor  of  Whiting.  The  average 
ton-mile  rate  from  Whiting  is  1.08  cents,  and  1.31  cents 
from  Toledo — .24  cents  in  favor  of  Whiting.  The 
average  distance  from  Whiting  is  751  miles  and  from 
Toledo  742  miles — 9  miles  in  favor  of  Toledo.  If  we 
take  43  towns  reached  by  way  of  Grand  Junction,  the 
average  distance  of  the  actual  route  to  them  from 
Whiting  is  1087  miles  as  against  712  miles  from  Toledo.^ 
From  this  we  see  that,  although  Toledo  is  on  the  average 
nearer  to  points  in  the  South-Central  Territory  than 
Whiting,  yet  the  latter  town  has  an  advantage  in  rates 

«  See  table,  G.,  p.  290. 
«  From  table  G.,  p.  296  ff. 


CHAPTER  TWO  35 

of  10.4  cents  per  hundred  pounds.  This  advantage, 
Mr.  Garfield  says,  "is  equal  to  about  five-eights  of  a 
cent  a  gallon.  Independent  refiners  can  live  on  a  profit 
of  one-fourth  a  cent  a  gallon  on  refined  oil  and  consider 
one-half  cent  liberal  return  on  their  investment  in  refin- 
ing plants.  The  Standard  Oil  Company  could  make  a 
large  profit  in  the  south  at  prices  that  would  leave  abso- 
lutely no  profit  to  independents.  It  is  not  remarkable 
tlierefore  that  the  Standard  Oil  Company  has  a  com- 
plete monopoly  of  the  sale  of  refined  oil  and  naptha  in 
the  southern  states.  .  .  .  The  prices  ...  are  ex- 
ceedingly high.  ...  In  large  areas  they  are  2  to  4 
cents  a  gallon  higher  than  in  certain  points  where  com- 
petition is  active,  after  taking  into  account  the  freight 
rates.  "^ 

The  Southwest  Territory,  comprising  the  states  of 
Arkansas,  Texas,  Oklahoma,  Indian  Territory,  Arizona, 
and  the  southern  half  of  Missouri,  presents  an  exactly 
similar  situation  to  the  one  just  described.  The  Stand- 
ard reached  this  territory  by  various  combinations  of 
rates — secret,  local,  and  otherwise — so  that  on  an  aver- 
age its  rates  to  the  Southwest  were  over  12  cents  per 
hundred  pounds  lower  than  from  Toledo;  whereas, 
compared  with  other  rates  of  the  same  class  as  oil,  the 
difference  should  have  been  only  5  cents  on  account  of 
the  greater  distance  for  Toledo.  The  difference  in 
favor  of  Whiting  produced  the  same  result  as  in  Ver- 
mont or  in  the  South,  namely  monopoly  for  the  Stand- 
ard Oil  Company. 

«  G.,  p.  302. 


36  MONOPOLY  AND  COMPETITION 

It  is  not  necessary  to  review  further  the  rebates  and 
discriminations  given  by  the  railroads  to  the  Standard 
Oil  Company.  It  would  be  merely  continuing  and 
repeating  the  same  stor}%  describing  how  in  each  case 
they  inevitably  forced  out  the  competitors  and  brought 
about  a  monopoly  for  the  Standard.  I  must  now  show 
the  reason  for  this  connection  between  railroad  dis- 
crimination and  monopoly — that  is,  I  must  inquire 
whether  or  not  the  rebates  received  by  the  Standard 
Oil  Company  were  sufficient  to  cover  the  margin  of 
profits  required  by  independents. 

The  inquiry  is  solved  by  finding  out  what  invest- 
ment is  required  in  the  oil  business  to  yield  a  reasonable 
profit.  The  Report  on  the  Petroleum  Industry*^  by 
the  United  States  Bureau  of  Corporations  gives  authori- 
tative statements  on  this  point.  The  average  invest- 
ment in  the  refining  business  for  five  Standard  re- 
fineries is  $1.05  per  barrel  of  crude.  The  average 
investment  in  the  marketing  business  for  the  same 
refineries  is  $1.24  per  barrel  of  crude  oil,  making 
a  total  of  $2.29.^^  The  average  investment  for  the 
five  independent  refineries  is  $1.23  per  barrel''^  of 
crude.  The  amount  invested  by  independents  in  the 
marketing  business  is  not  known,  but  their  marketing 
costs  are  no  higher  than  the  Standard's"*^  and  so  we 
may  suppose  the  investment  is  no  greater.  This 
would  bring  the  total  investment  for  the  independ- 

*^  Hereafter  referred  to  as  S. 

«  S.  2,  p.  605. 

"  S.  2,  p.  598,  600. 

"  Ibid.,  660. 


CHAPTER  TWO  37 

ents  to  $2.47  per  barrel  of  crude.  Assuming  8  per 
cent  to  be  a  living  profit,  then  the  Standard  would 
require  a  profit  of  18.32  cents  a  barrel  of  crude  and 
the  independents  19.76  cents.  Now  the  market  value 
of  the  refined  oil  derived  from  a  barrel  of  crude 
varies  from  50  to  70  per  cent  of  the  total  products.*^ 
Assuming  the  average  to  be  60,  then  60  per  cent  of  the 
profits  must  come  from  the  refined.  This  would  be 
11  cents  for  the  Standard  and  11.85  cents  for  the  inde- 
pendents. The  quantity  of  refined  derived  from  a 
barrel  of  crude  varies  from  14.5  to  24  gallons.  Sup- 
posing 19  gallons  to  be  the  average,  then  the  Standard 
must  realize  a  profit  of  .58  cents  and  the  independents 
.62  on  every  gallon  of  refined  sold.  But  a  reduction 
of  10  cents  per  hundred  pounds  of  freight  is  equal  to 
.64  cents  per  gallon.  Therefore,  if  the  Standard  has 
this  much  advantage  in  freight  rates,  it  can  sell  oil  at 
a  profit  for  prices  that  would  leave  less  than  nothing 
to  the  independents.  It  makes  no  difference  then 
whether  or  not  it  has  other  advantages  in  the  cost  of 
production.  The  discrimination  is  sufficient  to  kill 
competition.  From  these  results  it  can  be  clearly  seen 
that  rebates  and  discriminations  mean  a  surplus  in  the 
Standard's  treasury  but  bankruptcy  to  the  competi- 
tor. 

Our  summary  review  of  railroad  discrimination  in 
connection  with  the  Standard  Oil  Company  thus  shows 
how  they  made  possible  one  of  our  great  industrial 
monopolies.  Of  course,  the  Standard  aided  its  pro- 
gress by  a  few  other  factors  such  as  local  price  cutting 

"  S.  2,  p.  668  ff. 


2488(5,3 


38  MONOPOLY  AND  COMPETITION 

and  a  peculiar  system  of  espionage;  but  these  have  been 
factors  which  assisted  it  in  maintaining  its  monopoly 
rather  than  causal  factors  in  building  it  up.  Because 
of  these  advantages,  it  is  not  surprising  that  between 
1872  and  1906  the  Standard  Oil  Company  acquired 
the  interests  of  at  least  200  competitors  engaged  in 
refining  marketing,  and  piping  oil;^*^  destroyed  without 
acquiring  245^^  competitor's  between  1872  and  1879, 
and  an  unknown  number  since  that  period;  increased 
its  assets  between  1882  and  1906  from  $55,000,000  and 
$359,000,000;  earned  during  the  same  time  $838,000,000 
in  profits;  and  realized  25  per  cent  annually  on  its 
investment  and  48  per  cent  in  dividends  on  its  capital 
stock. ^2  Now,  doubtless,  good  business  methods  and 
technological  excellence  contributed  to  this  wonderful 
success.  But  considering  the  importance  of  rebates, 
it  seems  clear  that  the  railroads  accomplished  their  pur- 
pose in  maintaining  the  Standard  "against  injury  and 
loss  by  competition  to  the  end  that  it  may  have  a 
remunerative  and  so  a  full  and  regular  business." 

Section  II.  Judicial  Opinion  upon  Rate  Discrimina- 
tion. 

From  our  review  of  rebates  and  discrimination  in 
connection  with  the  Standard  Oil  Company,  we  can 
see  how  a  slight  discrimination  in  railroad  rates  de- 
termines absolutely  who  the  shipper  shall  be  and  who 

s"  Record,  Petitioners'  Brief,  Vol.  I,  p.  92  ff. 

"Emery,  Committee  on  Manufactures,  H.  R.,  1st  Sess.  49tb 
Cong.,  Vol.  9,  p.  232.     Exhibit  A . 

^^  Ibid.,  p.  170. 


CHAPTER  TWO  39 

shall  conduct  business  in  the  territory  to  which  the  dis- 
crimination is  made.  The  railroads,  for  this  reason, 
hold  in  their  hands  the  scales  of  competition  and  upon 
them  depends  the  answer  to  the  question  whether 
monopolies  shall  exist  or  fall.  Therefore,  the  adjust- 
ment of  railroad  rates  is  a  matter  of  no  small  im- 
portance, and  to  make  them  just  and  fair  to  all 
parties  concerned  presents  the  keenest  problem. 

Another  important  feature  to  notice  in  this  story  of 
rebates  is  that  the  Standard  Oil  Company  and  the  rail- 
roads bargained  together  and  made  special  deals  in  the 
same  way  that  is  common  between  private  individuals. 
The  reasons  for  rebates  were  purely  private  and  com- 
mercial.    For  the  railroads  the  Standard's  business  was 
an  important  item.     Rather  than  do  without  it,  they 
would  make  a  special  bargain,  because  even  a  small 
profit  was  better  than  none.     It  would  contribute  some- 
thing towards  general  expenses  and  might  also  help  in 
the  matter  of  dividends.     On  the  other  hand,  the  Stand- 
ard was  anxious  to  make  the  best  bargains  possible. 
A  reduction  in  rates  would  mean  not  only  that  much 
more  profit  but  the  greater  advantage  in  driving  out 
competitors,  who  always  disturbed  the  market.     How- 
ever, from  the  standpoint  of  public  policy,  it  is  a  very 
serious  question  whether  this  sort  of  special  bargaining 
between  monopolistic  corporations  is  permissible,  even 
for  business  reasons  which  may  appear  legitimate  in  a 
sense.     And  even  if  it  is  permissible  between  large 
industrial  corporations,  it  is  still  further  a  question 
whether  it  is  proper  in  any  way  for  common  carriers  to 
engage  in  such  special  bargaining.     The  question  is: 


40  MONOPOLY  AND  COMPETITION 

Can  a  large  corporation  behave  in  the  same  way  as  an 
ordinary  shopkeeper,  who  may  sell  a  suit  of  clothes  to 
one  man  at  a  certain  price  and  another  suit  of  the  same 
cost  to  another  man  at  a  different  price  ? 

The  present  chapter  will  deal  with  this  question  in 
its  relation  to  common  carriers  which,  it  is  agreed,  are 
affected  with  a  public  interest;  and,  in  the  following 
chapter,  we  will  consider  the  same  question  with  refer- 
ence to  large  industrial  corporations.  In  examining 
English  and  American  court  decisions  on  rebates  we 
find  judicial  authority  on  both  sides  of  the  question, 
and  we  shall  find  it  profitable  to  examine  the  argu- 
ments both  for  and  against  rate  discriminations. 

One  of  the  grounds  on  which  courts  have  favored 
rebates  and  discrimination  is  an  argument  based  on 
common  law.^^  It  may  be  put  as  follows:  Under  the 
common  law,  common  carriers  are  not  obliged  to  treat 
all  patrons  alike.  A  carrier  is  obliged  only  to  charge  a 
patron  a  price  for  services  which  is  reasonable  in  itself, 
and  what  others  are  charged  is  none  of  his  concern. 
As  Judge  Crompton  said:  "Charging  another  person 
too  much  is  not  charging  you  too  little."  A  carrier 
may  even  haul  goods  free  of  charge  to  one  person,  but 
this  does  not  in  the  least  obligate  him  to  haul  goods 
free  of  charge  to  all  persons.  And,  if  a  carrier,  in 
certain  isolated  cases,  makes  a  contract  to  haul  goods 
for  one  person  at  a  rate  that  is  below  the  usual,  regular, 

^^  Carton  and  another  v.  Bristol  and  Exeter  Ry.  Co.,  1  Q.  B. 
(B.  S.)  112  (1896);  Fitchburg  Ry.  Co.  v.  Gage  ct  al  (1859),  Gray 
393,  394,  399;  H.  and  T.  C.  Ry.  Co.  v.  Rust  and  Dinkins  (1882) 
58  Texas,  98. 110. 


CIIAPTE'R  TWO  41 

and  reasonable  rate,  he  may  undoubtedly  do  so  without 
entitling  others  to  the  same  advantages.  It  will  be 
seen  that  this  argument  applies  the  law  of  private  shop- 
keepers to  common  carriers,  and  does  not  consider  it 
as  changed  by  the  fact  that  the  latter  are  affected  with 
a  public  interest.  The  argument  always  forms  a  part 
of  "counsel's  brief  for  defendant,"  and  is  strongly  urged 
as  being  "the  law"  applicable  to  the  case  at  bar.  But 
we  shall  see  farther  on  that  the  common  law  was 
essentially  changed  by  statutes  which  recognized  a 
difference  between  private  shop-keepers  and  common 
carriers  affected  with  a  public  interest.  Besides  this 
argument  from  common  law,  courts  have  recognized  a 
second  argument  as  validating  the  practice  of  rebating. 
This  argument  applies  the  principles  of  the  wholesale 
trade  to  rate  charges. 

A  carrier  may  make  a  contract  giving  a  lower  rate  to 
a  shipper  who  furnishes  the  railroad  a  large  quantity 
of  traffic,  given  in  specified  amounts,  at  regular  inter- 
vals, and  for  a  long  period  of  time,  when  such  a  contract 
increases  the  legitimate  profits  of  the  railway  and  the 
discrimination  is  no  more  than  a  reasonable  consid- 
eration for  the  diminished  cost  of  service.  In  fact,  such 
advantages  are  similar  to  differences  made  between 
the  selling  of  goods  wholesale  and  retail.  Besides,  it 
is  a  matter  of  common  knowledge,  and  hence  one  of 
which  judicial  notice  is  taken,  that  an  increase  in  the 
volume  of  business  is  desirable  and  advantageous;  and, 
in  the  rivalry  of  business  competition,  it  is  lawful  to 
favor  those  whose  business  is  great,  rather  than  those 
whose  business  is  small  or  inconsiderable.     More  than 


42  MONOPOLY  AND  COMPETITION 

this,  the  lower  rate  in  favor  of  large  traffic  is  more 
profitable  to  the  railroad  than  higher  rates  on  small 
traffic  which  is  intermittent  and  irregular,  because  it 
results  in  greater  economy  in  arrangement  of  trains  and 
in  the  organization  of  the  service.  The  railway's  plant 
and  equipment  can  also  be  in  more  constant  use,  a 
condition  which  is  desirable  because  there  is  very  little 
more  expense  in  having  them  constantly  in  use  and  so 
earning  something  than  in  having  them  idle.  For 
exectly  similar  reasons  the  shipper  can  also  conduct  his 
plant  with  greater  economy,  and  it  is  desirable  for  the 
public  good  that  goods  for  consumption  be  produced  as 
cheaply  as  possible.  A  discrimination  in  favor  of  large 
traffic,  therefore,  is  desirable  both  for  the  railroad  and 
the  shipper  because  it  increases  the  profits  of  each; 
and  it  is  desirable  to  the  public  because  it  cheapens  the 
cost  of  production,  making  possible  a  lower  price  to 
the  consumer.^ 

Such,  in  a  modified  form,  is  the  line  of  argument  in 
the  Nicholson  case,  where  the  English  judges  affirmed 
the  validity  of  a  ten-year  contract  between  a  coal 
company  and  a  railroad,  the  latter  agreeing  to  make 
lower  rates  to  the  coal  company  in  consideration  of  its 
furnishing  train-loads  of  coal,  at  stipulated  intervals, 
and  in  such  quantities  that  the  railroad  would  receive 

^^  Nicholson  v.  G.  W.  Ry.  Co.  (1858),  5  C.  B.  (N.  S.)  336; 
Carton  v.  B.  and  E.  Ry.  Co.  (1859)  6  C.  B.  (N.  S.),  639,  655; 
C.  C.  C.  and  Ind.  Ry.  Co.  v.  Cosser  et  al.  (1890),  126  Ind.  348;  Root 
V.  Long  Island  R.  R.  Co.  (1894),  114  N.  Y.,  300;  Western  Union 
Tel.  Co.  V.  Pub.  Co.  (1900),  181  U.  S.  92;  Savitz  v.  Ohio  and  Miss- 
issippi R.  R.  Co.,  150  111.  208. 


CHAPTER  TWO  43 

40,000  pounds  sterling  annually  in  gross  earnings  from 
the  traffic.  The  case  has  been  cited  with  approval  by 
American  courts  in  several  instances,  and,  like  the 
argument  from  common  law,  always  forms  a  part  of 
the  argument  for  defendants  in  an  action  against 
rebating.  The  case  is  especially  important  in  view  of 
our  illustration  from  the  Standard  Oil  Company, 
because  almost  the  same  reasoning  is  given  by  Gen. 
Devereaux  in  an  affidavit  in  which  he  explains  why  he, 
as  vice-president  of  the  Lake  Shore  Railroad,  reduced 
the  rate  from  Cleveland  to  New  York  from  $2.00  a 
barrel  to  $1.30,  for  the  firm  of  Rockefeller,  Flagler, 
and  Andrews,  the  fore-runner  of  the  Standard.  He 
found  that  it  ordinarily  required  30  days  for  a  feight 
car  to  make  the  round  trip  from  Cleveland  to  New  York. 
But  on  being  guaranteed  a  solid  train  of  60  car-loads 
of  oil  per  day  the  time  for  the  trip  could  be  reduced  to 
10  days.  Consequently,  not  so  many  cars  would  be 
required  and  the  investment  for  the  company  on  this 
business  would  be  reduced  from  $900,000  to  $300,000. 
Because  of  these  facts  he  gave  them  the  lower  rate; 
since,  as  he  says,  "charges  for  transportation  being 
necessarily  based  upon  actual  cost  of  service  ...  to 
refuse  to  give  them  the  benefit  of  such  reduction  would 
be  to  the  detriment  of  the  public,  the  consumers,  who 
in  the  end  pay  the  transportation  charges.  "^^ 

The  argument  then  is  essentially  that  a  rebate  in 
favor  of  large  traffic  is  justifiable  because  of  a  dimin- 
ished cost  of  service.     Now  I  do  not  deny  that  to  base 

"Tarbell,  Hist,  of  the  Standard  Oil  Co.,  Vol.  1,  Appendi.x, 
p.  277-79. 


44  MONOPOLY  AND  COMPETITION 

the  rates  upon  cost  of  service  is  a  sound  policy;  but  to 
charge  one  large  shipper  a  rate  which  allows  a  reason- 
able profit  upon  cost  of  service  while  competitors  are 
charged  as  much  as  the  trafiic  will  bear  is  inconsistent. 
Besides,  there  may  be  cases  in  which  the  cost  of  service 
is  not  a  sound  principle,  especially  if  it  tends  to  foster 
a  monopoly.     Of  this  more  hereafter. 

The  fallacy  of  the  common  law,  which  provided  that 
common  carriers  must  make  their  charges  reasonable 
but  not  necessarily  equal  to  all,  was  soon  noticed  when 
railroads  began  to  play  an  important  part  in  the  com- 
mercial life  of  England.  It  was  observed  that  a  rail- 
road necessarily  had  a  monopoly  of  the  traffic  along 
much  of  its  line,  and  that,  by  making  unequal  charges 
to  different  shippers,  it  could  destroy  competition 
among  them  and  give  one  shipper  a  monopoly  of  a 
given  business.  On  this  account,  statutes  were  passed 
requiring  carriers  to  charge  equal  rates  on  goods  of  the 
same  description  and  under  the  same  circumstances. 
This  situation  is  well  explained  in  an  opinion  handed 
down  in  1869  by  the  House  of  Lords  through  Mr.  Jus- 
tice Blackburn. 

According  to  this  opinion,  if  a  party  sought  to  show 
that  under  the  common  law  he  was  charged  extortion- 
ately  by  a  railway,  it  was  not  enough  to  show  that  others 
were  charged  less  for  the  same  services;  for  the  com- 
mon law  allowed  this  and  even  permitted  a  carrier  to 
haul  goods  gratis  for  a  favored  individual.  Such  evi- 
dence only  tended  to  show  his  charge  to  be  unreason- 
able. But  in  the  Railways  Clauses  Consolidation  Act 
of  1845  the  Legislature  was  of  the  opinion  that  "the 


CHAPTER  TWO  45 

changed  state  of  things  arising  from  the  general  use  of 
the  railways"  made  it  expedient  to  impose  an  obligation 
on  them  beyond  what  is  required  at  common  law, 
namely,  the}-  might  charge  what  they  thought  fit,  but 
one  person  not  more  than  another,  during  the  same 
time  and  in  the  same  circumstances.  And  when  it  was 
sought  to  prove  charges  extortionate,  there  was  this 
proviso:  "  It  is  immaterial  whether  the  charge  is  reason- 
able or  not,  it  is  enough  to  show  that  the  company 
carried  for  some  other  person  or  class  of  persons  at  a 
lower  charge  during  the  period  throughout  which  the 
party  complaining  was  charged  more  under  like  cir- 
cumstances."^'' 

This  decision,  then,  over-ruled  the  earlier  ones  which 
permitted  rate  discrimination  by  railroads,  and  clearly 
recognized  that  the  principles  and  practices  allowed  to 
small  shop-keepers  could  not  be  allowed  to  the  rail- 
roads which,  as  common  carriers,  are  obliged  to  charge 
all  alike  under  the  same  circumstances,  for  the  same 
services,  during  the  same  time;  and  if  one  person  was 
charged  more  than  another,  that  was  ipso  facto  proof 
that  the  higher  rate  was  extortionate. 

It  was  not  long  until  some  of  the  judges  in  America 
also  perceived  the  injustice  of  permitting  the  railroads 
to  make  discriminations  in  their  rates  and  recognized 
the  distinction  between  private  and  public  business. 
Along  this  line  is  the  noted  opinion  handed  down  by  the 
Supreme  Court  of  New  Jersey  in  1873,  in  the  case  of 
Messenger  v.  Pennsylvania  R.  R.  Co.     The  plaintiffs 

"  Greal  Western  Ry.  Co.  v.  Sultan,  -1  L.  R.  Eng.  and  Irish  A[)i)., 
226,  239. 


46  MONOPOLY  AND  COMPETITION 

had  made  an  agreement  with  the  railroad  that  they 
should  be  given  a  rebate  of  20  cents  per  hundred 
pounds  from  Chicago  and  10  cents  from  Pittsburgh  on 
live  hogs  shipped  by  them  to  Jersey  City.  Further, 
if  other  parties,  except  seven  named,  should  receive  a 
drawback  for  the  same  services,  plaintiff's  rate  should 
be  20  and  10  cents  below  such  rates  according  as  they 
were  from  Chicago  or  Pittsburgh.  This  second  condi- 
tion was  not  complied  with,  wherefore  plaintiff  sued 
to  recover  rebates  as  per  contract.  It  will  be  noticed 
that  this  agreement  is  substantially  the  same  as  the 
rebating  contract  made  by  the  South  Improvement 
Company  with  the  same  railroad,  and  is,  therefore, 
deserving  of  attention.    The  Court  said: 

"A  merchant  who  can  transport  his  wares  to  market 
at  less  cost  than  his  rivals,  will  soon  acquire,  by  under- 
selling them,  a  practical  monopoly  of  the  business. 
.  .  .  The  tendency  of  such  compacts  is  adverse  to  the 
public  welfare,  which  is  materially  dependent  on  com- 
mercial competition  and  the  absence  of  monopolies. 
.  .  ,  ''The  defendants  are  common  carriers  and  it  is 
contended  that  bailees  of  that  character  cannot  give 
preference  in  the  exercise  of  their  calling.  .  .  .  Such 
partiality  is  legitimate  in  private  business,  but  how  can 
it  square  with  the  obligation  of  a  public  employment? 
...  to  permit  the  common  carrier  to  charge  various 
prices  according  to  the  person  with  whom  he  deals,  for 
the  same  services,  is  to  forget  that  he  owes  a  duty  to 
the  community.  ...  A  company  of  this  kind  is 
invested  with  important  prerogative  franchises,  among 
which  are  the  rights  to  build  and  use  a  railway,  and  to 


CHAPTER  TWO  47 

charge  and  take  tolls  and  fares.  ...  If  they  had 
remained  under  the  control  of  the  state,  it  could  not 
be  pretended,  that  in  the  exercise  of  them,  it  would 
have  been  legitimate  to  favor  one  citizen  at  the  expense 
of  another.  ...  In  their  very  nature  and  constitu- 
tion, as  I  view  this  question,  the  companies  become,  in 
certain  aspects,  public  agents,  and  the  consequence  is 
they  must,  in  the  exercise  of  their  callings,  observe  to 
all  men  a  perfect  impartiality."^^ 

In  this  case,  it  does  not  appear  that  the  rebate  was 
granted  because  of  an  unusually  large  traffic.  But  the 
danger  of  such  discrimination  was  clearly  perceived  by 
the  federal  court  in  Ohio,  in  Hays  v.  Pennsylvania  Co., 
which  for  America  over-ruled  the  Nicholson  case  in 
England.  Plaintiff  was  discriminated  against  in  rates 
for  carrying  coal.  Defendant  had  a  scheme  providing 
a  rebate  varying  from  30  to  70  cents  per  ton  to  compan- 
ies or  persons  shipping  5,000  tons  or  more  per  year,  the 
amount  of  rebate  varying  with  the  quantity  shipped. 
The  court  said:  "The  discrimination  complained  of 
rested  solely  on  the  amount  of  freight  supplied  by  the 
"respective  shippers  during  the  year.  Ought  a  dis- 
crimination resting  exclusively  on  such  a  basis  be  sus- 
tained? If  so,  then  the  business  of  the  country  is,  in 
some  degree,  subject  to  the  will  of  the  railroad  officials; 
for,  if  one  man  engaged  in  mining  coal,  and  dependent 
on  the  same  railroad  for  transportation  to  the  same 
market,  can  obtain  transportation  thereof  at  from  25 
to  50  cents  per  ton  less  than  another  competing  with 
him  in  business,  solely  on  the  ground  that  he  is  able  to 
"  36  N.  J.,  407,  409,  410,  412,  413,  414. 


48  MONOPOLY  AND  COMPETITION 

furnish  and  does  furnish  the  larger  quantity  for  ship- 
ment, the  smaller  operator  will  sooner  or  later  be 
forced  to  abandon  the  unequal  contest  and  surrender 
to  his  more  opulent  rival.     If  the  principle  is  sound 
in  its  application  to  rival  parties  engaged  in  mining 
coal,  it  is  equally  appUcable  to  .  .  .  everybody  else 
interested  in  any  business  requiring  any  considerable 
amount  of  transportation  by  rail;  and  it  follows  that 
the  success  of  all  such  enterprises  would  depend  as 
much  on  the  favor  of  railroad  officials  as  upon  the  ener- 
gies and  capacities  of  the  parties  prosecuting  the  same. 
"It  is  not  difficult,  with  such  a  ruling,  to  forecast  the 
consequences.     The  men  who  control  railroads  would 
be  quick  to  appreciate  the  power  with  which  such  a 
holding  would  invest  them,  and,  it  may  be,  not  slow 
to  favor  their  friends  to  the  detriment  of  their  personal 
or  pohtical  opponents,  or  demand  a  division  of  the 
profits  realized  from  such  collateral  pursuits  as  could 
be  favored  or  depressed  by  discrimination  for  or  against 
them;  or  else,  seeing  the  augmented  power  of  capital, 
organize  into  overshadowing  combinations  and  extin- 
guish all  petty  competition,  monopolize  business,  and 
dictate  the  price  of  coal  and  every  other  commodity  to 
the  consumers.  .  .  .     Capital  needs  no  such  extrane- 
ous aids.     It  possesses  inherent  advantages  which  can- 
not be  taken  from  it.     But  it  has  no  just  claim,  be- 
cause of  its  accumulated  strength,  to  demand  the  use 
of  the  pubhc  highways  of  the  country  constructed  for 
the  common  benefit  of  all,  on  more  favorable  terms  than 
are  accorded  to  the  humblest  in  the  land ;  and  a  discrim- 
ination in  favor  of  parties  furnishing  the  largest  quan- 


CHAPTER  TWO  49 

tity  of  freight,  and  solely  on  that  ground,  is  a  discrim- 
ination in  favor  of  capital,  and  is  contrary  to  a  sound 
public  policy,  violative  of  that  equality  of  right  guar- 
anteed to  every  citizen,  and  a  wrong  to  the  disfavored 
party,  for  which  the  courts  are  competent  to  give 
redress."  ^^ 

I  have  quoted  the  above  opinions  at  some  length, 
because  they  are  representative  of  the  prevailing  rul- 
ings in  the  United  States  against  railroad  discrimina- 
tions. A  discrimination  in  rates  is  unlawful  because 
of  public  policy.  The  railroad  company  is  created  by 
the  state  to  perform  one  of  its  functions,  and,  as  per- 
forming such  a  function  in  the  capacity  of  a  public 
agent,  is  obliged  to  treat  all  men  with  perfect  imparti- 
ality, because  this  is  required  to  promote  the  good  of 
the  state.  The  common  good  of  the  state  is  also 
materially  dependent  upon  the  prevalence  of  competi- 
tion and  the  absence  of  monopoly.  Therefore,  a  rail- 
road cannot  make  discriminations  in  its  charges, 
because  this  destroys  competition  and  establishes  mon- 
opoly which  can  by  its  own  power,  and  at  its  will,  fix 
the  prices  of  commodities  to  consumers. 

What  is  interesting  in  these  decisions  for  and  against 
rate  discrimination  is  the  development  of  the  concep- 
tion that  railroads  come  under  the  rule  of  pubhc  law. 
The  early  discussions  in  favor  of  discrimination  apply 
the  old  rules  of  private  business  and  do  not  take 
cognizance  of  new  conditions  caused  by  the  introduction 

"  12  Fed.  309,  313,  314;  cf.  also  Louisville  etc.,  R.  R.  Co.  v. 
Wilson,  132  Ind.  517.  Griffin  v.  Goldsboro  Water  Co.,  122  N.  C, 
206;  Fitzgerald  and  Co.' v.  Grand ^Trunk[R.  R. 


50  MONOPOLY  AND  COMPETITION 

of  the  railroad  into  the  field  of  commerce.  Psychologi- 
cally, the  old  habits  persist  in  the  new  situation  without 
an  awareness  of  their  inadequate  functioning.  Legally, 
it  is  a  firm  adherence  to  the  precedents  governing  the 
case  without  a  critical  study  of  the  facts.  Such  a  pro- 
cedure is  quite  natural  until  the  inadequacy  of  the  rules 
of  private  business  as  applied  to  a  pubhc  carrier  has 
been  made  distinct  by  a  study  of  results,  namely,  that 
the  application  of  private  law  to  a  public  carrier  results 
in  a  destruction  of  healthy  competition  between  ship- 
pers, and  in  the  reestablishment  of  a  monopoly  for  the 
favored  shipper,  the  evil  of  which  was  made  clear  in 
Hays  V.  Pennsylvania  Co.  After  this  result  was  forseen, 
the  application  of  private  law  was  abandoned  and  the 
conception  developed  that  a  railroad's  business  is  pub- 
lic in  character  and  should  therefore  discharge  its 
duties  impartially  like  the  state  itself.  This  procedure 
is  justified  because  it  is  in  the  interest  of  the  public. 
The  judges  developing  this  conception  are  not  closely 
governed  by  precedent  but  make  a  close  study  of  the 
facts  of  the  situation  to  which  their  ruling  is  to  apply. 
Precedent  failing  them,  they  appeal  to  what  they  con- 
sider the  ultimate  ground  of  law  and  the  purpose  for 
which  law  exists,  namely,  the  promotion  of  the  com- 
mon good  or  welfare  or  the  public  interest.  It  is  the 
judge  who  is  constructing  law  that  holds  this  situation 
before  him,  and,  in  point  of  time,  he  usually  comes 
toward  the  close  of  a  transition  period,  a  stage  of 
conflict  between  old  rules  and  new  conditions.  On  the 
other  hand,  the  judge  who  comes  at  the  beginning  of 
such  a  period  of  transition  or  conflict  or  who  is  in  cir- 


CHAPTER  TWO  51 

cumstances  where  rules  and  situations  happen  to  fit, 
pays  no  attention  to  any  such  criterion  but  merely 
studies  precedent  and  gives  his  decision  accordingly. 
Psychologically,  this  is  similar  to  the  change  from  old 
to  new  habits  in  an  individual,  the  difference  being  that 
laws  are  social  habits  instead  of  personal  ones.  It  can- 
not be  doubted  that  these  psychological  and  method- 
ological differences  between  the  judges  giving  these 
opposite  opinions  are  fundamental  in  the  explanations 
of  their  rulings,  a  point  which  will  become  more  clear 
in  our  study  of  court  decisions  on  the  competition 
between  manufacturers  or  producers. 

Section  III.  How  the  Courts  Developed  a  New  Prin- 
ciple for  Testing  the  Fairness  of  Railroad  Rates. 

Having  once  established  the  view  that  railroads  are 
public  service  corporations,  and,  as  such,  are  under 
obligation  to  charge  all  shippers  impartially,  the  courts 
put  upon  themselves  the  necessity  of  constructing  a 
principle  by  which  fair  and  impartial  rates  may  be 
determined.  The  growing  character  of  law  together 
with  the  conflicts  and  differences  incident  to  such 
growth  is  clearly  illustrated  in  the  line  of  decisions 
aiming  to  establish  what  constitutes  a  fair  basis  of 
rate  charges.     These  we  shall  accordingly  review. 

In  Smith  v.  Ames  the  Supreme  Court  said:  "What 
the  company  is  entitled  to  is  a  fair  return  upon  the 
value  of  the  property  which  it  employs  for  the  public 
convenience."  With  this  proposition  there  has  been 
very  general  agreement  from  all  sides.  But  there  has 
been  very  general  disagreement  as  to  what  constitutes 
"fair  return"  and  "value." 


52  MONOPOLY  AND  COMPETITION 

With  reference  to  value  there  have  been  in  the  main 
two  theories,  the  one  that  value  is  determined  by  cost 
and  the  other  that  it  is  determined  by  earning  capacity. 
The  cost  theory  has  taken  two  general  forms:  the  first 
that  value  is  determined  by  what  it  cost  originally  to 
make  the  article  or  plant;  the  second  that  value  is 
determined  by  what  it  costs  to  reproduce  the  article 
or  plant  in  its  present  condition,  allowing  both  for 
depreciation  and  appreciation.  The  emphasis  has  been 
decidedly  upon  this  second  form,  and  as  such,  is  used 
by  a  number  of  public  service  commissions  for  determ- 
ining the  reasonableness  of  rate  charges.  There  is, 
however,  some  judicial  authority  in  favor  of  the  earn- 
ing capacity  theory,  and  it  will  be 'best  to  review  this 
first. 

In  Chicago,  Milwaukee,  6°  St.  Paul  v.  Minnesota^^ 
the  Supreme  Court  said:  "If  the  company  is  deprived 
of  the  power  of  charging  reasonable  rates  for  the  use 
of  its  property,  it  is  deprived  of  the  lawful  use  of  its 
property,  and  thus  in  substance  of  the  property  itself," 
recognizing  that  a  property  must  have  some  earning 
capacity  in  order  to  have  any  value  at  all.  This  prin- 
ciple was  reafhrmed  in  Cleveland  and  Railway  Co.  v. 
Backus,^'^  which  was  a  taxation  case.  In  this  the  Court 
said  that  the  value  of  a  property  results  from  its  use 
and  that  outside  of  its  use  it  has  no  pecuniary  value. 
"Take  for  an  illustration,"  explained  the  Court, 
"property  whose  sole  use  is  for  purposes  of  interstate 
commerce,  such  as  a  bridge  across  the  Ohio,  between 

"  134  U.  S.  458. 

«"  154  U.  S.  445,  446. 


CHAPTER  TWO  53 

the  states  of  Ohio  and  Kentucky.  From  that  springs 
its  entire  value.  .  .  .  Suppose  that  there  be  two 
bridges  across  the  Ohio,  one  between  Cincinnati  and 
Newport,  and  another  twenty  miles  below  where  there 
is  nothing  but  a  small  village  on  either  shore.  The 
value  of  the  one  will  manifestly  be  greater  than  that 
of  the  other."  In  San  Diego  Land  and  Town  Co.  v. 
Jasper^^  it  was  said  that  original  cost  does  not  determine 
value.  On  the  contrary,  a  plant  has  an  actual  value," 
which  the  Court  said,  "depends  upon  a  variety  of  con- 
siderations, among  them,  the  actual  and  prospective 
number  of  customers." 

Although  the  phrase,  earning  capacity,  does  not  occur 
in  these  quotations,  yet  it  is  clearly  implied;  for  "use," 
"rates,"  "number  of  customers,"  etc.,  are  the  deter- 
minants of  earnings,  and  upon  these,  it  is  said  value 
depends.  No  one  would  deny  that  earnings  are  a  fac- 
tor in  determining  value,  at  least  market  or  sale  value. 
If  a  corporation  could  not  earn  anything,  it  would  be 
worth  nothing  at  all.  Our  present  problem,  however, 
is  not  how  earnings  determine  value,  but  how  much  a 
company  may  fairly  earn  and  by  what  tests  we  can  tell 
whether  or  not  a  given  earning  is  fair.  If  we  intend 
to  fix  a  capitalization  upon  which  to  base  and  calculate 
a  fair  earning,  it  is  clear  that  we  cannot  use  earning  as 
the  basis  of  our  capitalization,  for  this  would  be  moving 
in  a  circle.  This  difficulty  was  noticed  by  Judge 
Thayer  in  ColUngs  v.  Kansas  City  Stockyards  Co.^^  He 
said  that  income  cannot  be  accepted  as  the  test  of  the 

«'  110  Fed.  714. 
•2  82  Fed.  854. 


54  MONOPOLY  AND  COMPETITION 

value  of  a  property  affected  with  a  public  use  because 
the  owner  may  have  made  excessive  charges  for  its  use. 
Nor  can  the  amount  of  capitalization  be  made  a  test 
"because  the  stock  may  not  represent  money  actually 
invested,  and,  furthermore,  because  the  property  may 
have  been  capitalized  with  reference  to  its  income 
producing  capacity." 

It  is  because  of  the  reasons  mentioned  by  Judge 
Thayer  that  most  of  the  cases  upon  valuation  have  cen- 
tered about  the  cost  theory.  But  even  in  determining 
value  apart  from  earnings  there  are  many  elements  to 
be  considered.  For  example,  in  Smith  v.  Ames,  the 
Supreme  Court  said:  .  .  .  "the  basis  of  all  calcula- 
tions as  to  the  reasonableness  of  rates  must  be  the  fair 
value  of  the  property  used  for  the  convenience  of  the 
public.  And  in  order  to  ascertain  that  value,  the 
original  cost  of  construction,  the  amount  expended  in 
permanent  improvements,  the  amount  and  market 
value  of  its  bonds  and  stocks,  the  present  as  compared 
with  the  original  cost  of  construction,  the  probable  earn- 
ing capacity  of  the  property  under  particular  rates 
prescribed  by  statue,  and  the  sum  required  to  meet 
operating  expenses  are  all  matters  for  consideration."®^ 

The  items  mentioned  here  all  undoubtedly  enter  into 
market  value,  but  upon  reflection,  it  at  once  becomes 
clear  that  they  cannot  all  enter  into  the  "fair  value" 
which  is  to  be  a  basis  for  rate  charges,  for  they  include 
both  cost  items  and  income  items.  Income  depends 
upon  rate  charges,  and  where  the  fairness  of  income  and 
rates  is  in  question,  it  is  again  moving  in  a  circle  to 
«  169  U.  S.  547. 


CHAPTER  TWO  55 

capitalize  the  income  and  then  calculate  the  income 
and  base  the  rates  upon  this  capitalization. 

Later  decisions  of  the  Supreme  Court  have  made  the 
"fair  value"  that  is  to  be  the  basis  of  rate  charges  more 
specific.  In  San  Diego  Land  and  Town  Co.  v.  National 
Ciiy,^*  the  Court  said  that  the  value  of  the  property, 
meaning  principally  the  tangible  assets,  was  to  be  taken 
"at  the  time  it  is  being  used  for  the  public,"  and  this 
as  against  the  original  cost  or  amount  of  bonds  both 
of  which  may  have  been  excessive.  This  opinion  was 
reaffirmed  by  Justice  Holmes  in  San  Diego  Land  ajid 
Town  Co.  V.  Jasper  and  again  by  Justice  Peckham  in 
Stanislaus  v.  San  Joaquin  C.  dr  I.  Co.^^  But  the 
clearest  opinion  along  this  line  was  by  Judge  Hough  in 
the  Consolidated  Gas  case.  He  said,  "In  every  in- 
stance, however,  the  value  assigned  in  the  report  is 
what  it  would  cost  to  reproduce  each  item  of  property, 
in  its  present  condition,  and  capable  of  giving  service, 
neither  better  or  worse  than  it  now  does.   .   .   . 

"Upon  authority,  I  consider  this  method  of  valua- 
tion correct."  Then  referring  to  the  cases  cited  above 
he  continues:  "It  is  impossible  to  observe  this  con- 
tinued use  of  the  present  tense  in  these  decisions  of  the 
highest  court  without  feeling  that  the  actual  or  repro- 
ductive value  at  the  time  of  the  inquiry  is  the  first  and 
most  important  figure  to  be  ascertained.  .  .  .  Upon 
reason  it  seems  clear  that  in  solving  this  equation,  the 
plus  and  minus  quantities  should  be  equally  considered, 
and  appreciation  and  depreciation  treated  alike.  "^^ 

«  174  U.  S.  757. 
M  189  U.  S.  442. 
«  157  Fed.  855. 


56  MONOPOLY  AND  COMPETITION 

When  this  case  was  appealed  to  the  Supreme  Court 
under  the  title  of  Wilcox  v.  Consolidated  Gas  Co.,^'' 
Justice  Peckham,  who  delivered  the  opinion,  concurred 
with  the  lower  court  upon  the  method  of  valuation  and 
said  further:  "If  the  property  which  enters  legally  into 
the  consideration  of  the  question  of  rates  has  increased 
in  value,  since  it  was  acquired,  the  company  is  entitled 
to  the  benefit  of  such  increase.  This  at  any  rate  is 
the  general  rule." 

Cost  of  reproduction  in  present  condition,  allowing 
both  for  appreciation  and  depreciation,  is  thus,  accord- 
ing to  the  courts,  the  proper  basis  for  determining  the 
reasonableness  of  rates,  in  case  of  a  public  service  cor- 
poration. It  is  not  original  cost,  for  the  plant  may 
not  have  been  economically  constructed;  nor  income, 
for  this  may  be  the  product  of  unreasonable  rate 
charges;  nor  is  it  capitalization,  for  this  may  not 
represent  money  actually  invested  or  it  may  be  used 
on  unreasonable  rate  charges. 

Valuation,  as  thus  determined,  has  reference  chiefly 
to  the  physical  properties  used  for  the  public  conven- 
ience, such  as  real  estate,  plant,  equipment,  working 
capital,  etc.,  the  so-called  tangible  assets.  This  valua- 
tion, while  correct  in  most  items,  yet  appears  open  to 
question  upon  the  unearned  increment  in  land.  There 
are  several  reasons  why  the  allowance  of  this  to  a  public 
service  corporation  is  inadvisable.  It  is  well  known 
that  land  in  a  growing  city  or  country  increases  in  value 
whether  or  not  the  owner  makes  improvements  upon 
it.  It  cannot  be  denied  that  hope  of  enjoying  this 
"  212  U.  S.  52. 


CHAPTER  TWO  57 

increase  has,  in  many  cases,  been  a  stimulus  to  owners 
for  making  improvements  and  it  also  has  been  an 
inducement  to  pioneers  in  settling  and  building  up  a 
new  country.  In  such  cases,  however,  the  "unearned 
increment"  can  hardly  be  said  to  be  unearned.  But 
whatever  may  be  the  justness  of  allowing  the  unearned 
increment  in  land  to  private  individuals,  the  case  is 
different  with  public  service  corporations;  for  here  the 
incentive  to  business  is  profit  -from  volume  of  traffic. 
Besides,  a  public  service  corporation  is  chartered  by 
the  state  to  perform  a  particular  function,  and  because 
of  this,  it  has  the  right  of  eminent  domain  to  locate  its 
properties  where  it  chooses.  It  can,  therefore,  select 
those  places  where  land  is  apt  to  rise  most  rapidly  in 
value.  If  it  fails  to  select  them  upon  its  first  right-of- 
way,  it  can  do  so  later.  A  private  individual,  however 
once  having  purchased  land  cannot  move  his  property 
to  a  more  favorable  location  nor  can  he  dispossess  the 
owners  whose  land  is  apt  to  increase  most  rapidly  in 
value.  This  is  possible,  however,  to  a  public  service 
corporation,  and  its  primary  object  in  doing  so  may  be 
to  enjoy  the  unearned  increment.  If  so,  the  unearned 
increment  is  an  incentive  to  an  abuse  of  privilege  rather 
than  for  making  improvements.  For  this  reason  its 
enjoyment  is  properly  denied  to  a  public  service  com- 
pany. The  company  can,  of  course,  argue  that  it  is  a 
producer  of  the  increase  in  land  value,  but  to  this  it  is 
sufficient  to  reply  that  whatever  it  contributes  to  the 
material  development  of  a  community,  it  fully  regains 
in  the  subsequent  increase  in  the  volume  of  traffic  or 
business.     No  one  would  deny  that  if  a  corporation 


58  MONOPOLY  AND  COMPETITION 

pays  for  real  estate,  it  should  be  allowed  to  make  this 
cost  a  part  of  its  capitalization;  but  this  is  no  reason  to 
allow  it  to  enjoy  the  unearned  increment. 

In  addition  to  admitting  into  the  capitalization  the 
tangible  assets,  the  courts,  in  some  cases,  have  recog- 
nized many  so-called  intangible  assets,  such  as  favor- 
able location,  good  will,  good  management,  going 
value,  and  franchise.  But  none  of  these  have  been 
admitted  by  the  Supreme  Court  as  permanently  allow- 
able elements  in  the  valuation  that  is  to  be  the  basis  for 
determining  rates;  and  with  reason,  for  the  value  of 
these  elements  depends  upon  the  earning  capacity  of 
the  plant.  If,  therefore,  any  allowance  should  be  made 
for  them,  it  can  be  done  more  equitably  in  the  rate  of 
profit  than  in  the  valuation  upon  which  profits  are  calcu- 
lated. In  this  way  we  avoid  the  circle  of  capitahzing 
profits  or  earnings  and  then  testing  the  fairness  of 
earnings  by  this  capitalization. 

Location,*^^  for  example,  has  value  only  in  so  far  as 
it  affects  earnings.  A  railroad  which  has  accessible 
terminals  in  the  chief  centers  of  distribution,  many  con- 
nections, and  many  enterprises  along  its  lines  will  have 
far  greater  earnings  than  one  that  is  connected  prin- 
cipally with  small  and  thriftless  towns,  although  the 
cost  of  reproduction  of  either  one  would  be  the  same. 
Such  a  circumstance,  if  it  is  the  result  of  choice  and 
good  management,  may  possibly  be  an  allowable  excuse 
for  larger  profits.  But  to  capitalize  these  profits  and  then 
argue  that  the  rate  of  profit  is  no  more  than  the  ordinary 
rate  of  interest  upon  the  capitalization  is  to  test  the 

"  90  Fed.  687;  91  C.  C.  Rep.  402;  113  Pac.  681. 


CHAPTER  TWO  59 

fairness  of  earnings  by  themselves.  If  the  capitaliza- 
tion is  to  be  a  criterion  of  fair  earnings,  it  is  clear  that 
such  a  feat  is  impossible. 

The  same  reasoning  applies  to  good  will,''''  which  has 
been  defined  by  Lord  Eldon  as  "  nothing  more  than  the 
probability  that  old  customers  will  resort  to  the  old 
place."  This  implies  choice  as  to  whom  the  con- 
sumer shall  give  his  custom  and  can  therefore  exist  only 
in  a  competitive  business.  In  a  monopoly,  however, 
the  old  customer  must  resort  to  the  old  place  or  else 
do  without  the  monopolist's  goods.  For  this  reason 
the  Supreme  Court  in  the  Consolidated  Gas''^  case  admit- 
ted that  a  monopoly  cannot  have  any  good  will  and 
can  neither  capitalize  it  nor  make  it  an  excuse  for 
increased  profits. 

Allowance  for  favorable  location  was  admitted  in 
Metropolitan  l^ust  Co.  v.  Houston,  etc.,^^  as  part  of 
the  capitalization  upon  which  the  railroad  is  entitled 
to  earn  a  return.  The  judge  argued  that  because 
the  road  in  question  ran  through  the  most  populous 
and  growing  part  of  the  state  and  was  put  there  by 
judicious  selection,  it  had  established  a  business  which 
could  not  be  disregarded  in  estimating  the  value  of 
the  road  either  as  a  business  property  and  venture 
of  the  road  either  as  a  business  property  and  venture 
or  as  a  property  having  a  quasi-public  nature.     In 

•'  Lord  Eldon,  Words  and  Phrases. 

'"Consolidated  Gas  case,  157  Fed.  872;  idem,  212  U.  S.  52; 
see  also  Cedar  Gas  Light  Co.  v.  City  of  Cedar  Rapids,  120  N.  W. 
Rep.  969;  supra,  90  Fed.  687. 

"90  Fed.  687-8. 


60  MONOPOLY  AND  COMPETITION 

re-proposed  advances  in  freight  rates, '''^  the  Interstate 
Commerce  Commission  said  that  the  value  of  a  raihvay 
system  is  principally  a  matter  of  location,  terminal 
facilities,  connections,  and  enterprises  long  the  line, 
and  that  allowance  should  be  made  for  the  ability  and 
foresight  that  worked  out  and  perfected  the  system. 
The  element  of  location,  if  it  is  a  matter  of  judicious 
relation  and  foresight,  may  be  a  reasonable  ground  for 
increased  profits,  but  to  capitalize  these  profits  and 
then  argue  that  the  rate  of  profit  is  fair  because  it  is  no 
higher  than  the  ordinary  rate  of  interest  upon  the 
capitalization,  is  again  testing  the  fairness  of  earn- 
ings by  themselves. 

This  reasoning  applies  in  the  same  way  to  good 
management.'^  The  success  or  failure  of  a  business 
often  turns  upon  good  management.  As  before  inti- 
mated, the  location  of  a  railway  with  reference  to  ter- 
minals, connections,  and  enterprises  may  be  the  result 
of  this  art.  On  the  other  hand,  if  a  railway  is  efficiently 
managed,  running  its  trains  regularly  and  delivering 
all  its  goods  promptly,  enterprises  may  choose  to  locate 
along  its  lines  on  this  account  and  so  increase  its  busi- 
ness. This  is  none  the  less  true  of  a  monopoly  than  of 
a  competitive  business.  Again,  a  good  manager  often 
impresses  his  art  upon  the  property  and  business  so 
that  it  continues  to  live  long  after  him,  and  as  a  conse- 
quence, the  business  is  always  prosperous.  If,  on  the 
contrary,  a  railroad  has  poor  managers  during  its  early 
history,  it  may  be  generations  before  it  can  overcome 

^2  9  I.  C.  C.  402. 

"  See  1 13  Pac.  68 1 ;  59  At.  540. 


CHAPTER  TWO  61 

the  bad  effects  of  the  same.  Because  of  the  importance 
of  good  management  it  is  both  in  the  interest  of  the 
railway  and  the  community  to  have  talent  along  this 
line  developed  as  much  as  possible,  and  some  reward 
ought  to  be  offered  to  stimulate  it.  Tf,  however,  we 
allow  good  management  to  be  capitalized,  not  only 
would  all  the  stockholders  share  in  it  alike  whether  or 
not  they  contribute  anything  to  the  management  but 
we  should  also  fall  into  the  vicious  circle  descr  bed 
above,  i.  e.,  we  should  be  capitalizing  earnings.  But  if 
the  fairness  of  the  earning  is  in  question,  we  cannot 
capitalize  earnings  at  the  ordinary  rate  of  interest,  and 
then  turn  around  and  argue  that  earnings  are  fair, 
because  they  will  yield  an  ordinary  rate  of  interest 
upon  the  capitalization.  Like  location,  good  manage- 
ment is  therefore  best  provided  for  either  in  the  rate 
of  profit  or  in  the  way  of  an  increased  salary. 

Good  will  having  been  excluded  from  the  capitaliza- 
tion of  a  monopoly,  many  corporations  have  tried  to 
find  a  substitute  in  "going  value"  by  which ^^  is  under- 
stood that  value  a  plant  possesses  in  virtue  of  its  being 
a  live  one,  operating  and  earning,  instead  of  a  dead  one 
only  capable  of  earning.  It  has  been  admitted  by 
some  courts  as  a  proper  element  in  determining  market 
or  sale  value  but  the  Supreme  Court  has  not  allowed 
it  to  be  made  a  part  of  the  capitalization  for  determin- 
ing rates.  For  example,  in  National  Water-works  Co. 
V.  Kansas  City,  which  was  a  case  to  determine  the  sale 
value  of  a  water  plant.  Justice  Brewer  said:  "The  fact 
that  it  (the  water  plant)  is  a  system  in  operation,  not 
"  120  N.  W.  Rep.  969;  113  Pac.  681. 


62  MONOPOLY  AND  COMPETITION 

only  with  a  capacity  to  supply  the  city,  but  actually 
supplying  many  buildings  in  the  city — not  only  with 
a  capacity  to  earn  but  actually  earning — makes  it 
true  that  "  the  fair  and  equitable  value"  is  something  in 
excess  of  the  cost  of  reproduction. ^^  This  opinion  was 
afi&rmed  by  the  Supreme  Court  in  Omaha  v.  Omaha 
Water  Co.,""^  which  was  also  a  case  for  determining  the 
sale  value  of  a  water  plant.  But  the  court  took  care 
to  add:  "No  such  question  was  considered  in  Knoxville 
V.  Knoxville  Water  Co.,  212U.  S.  1,  or  in  Wilcox  v.  Con- 
solidated Gas  Co.,  212U.  S.  19.  Both  cases  were  rate 
cases  and  did  not  concern  the  ascertainment  of  value 
under  contracts  of  sale,"  thus  carefully  distinguishing 
between  "going  value"  as  an  allowable  element  of  market 
value  and  as  an  unallowable  element  of  a  capitalization 
that  is  to  be  the  basis  for  rate  charges.  If  the  court 
would  not  make  this  distinction,  we  should  again  be 
allowing  an  opening  for  "watered  stock,"  permit  the 
capitalization  of  earnings,  and  so  defeat  our  criterion 
for  determining  a  fair  earning.  But  "going  value"  as 
an  element  of  market  or  sale  value  seems  fair,  for  the 
earnings  of  a  plant  already  in  operation  are  more  cer- 
tain than  the  earnings  of  one  that  has  not  been  tried. 
A  buyer  would  be  willing  to  allow  something  for  this 
greater  security.  To  put  a  new  plant  into  operation 
would  require  time,  some  changes  and  repairs  would 
probably  have  to  be  made,  the  construction  might  be 
faulty  and  require  adjustment,  etc. — these  elements, 

«  62  Fed.  865;  also  affirmed  in  17  Mass.  865,  and  in  76  Conn. 
565. 

7«218U.  S.  203. 


CHAPTER  TWO  63 

for  the  first  year  at  any  rate,  would  lessen  gross  earnings 
and  increase  operating  expenses  so  that  the  market 
value,  which  is  largely  dependent  upon  earnings,  would 
be  appreciably  less  than  of  a  plant  having  an  equal 
reproductive  cost  but  already  earning  and  operating. 
For  this  reason,  "going  value"  is  allowable  in  a  case  of 
sale;  but  to  make  both  it  and  the  small  earnings  of 
the  first  year  a  part  of  the  capitalization  is  again 
allowing  an  opening  for  "water"  and  introducing  the 
circle  of  capitalizing  earnings  at  the  ordinary  rate  of 
profit  and  then  arguing  that  the  profits  are  fair  because 
they  are  no  more  than  the  ordinary  rate  of  profit  upon 
the  capitalization. 

The  biggest  loophole,  however,  to  public  service 
corporations  for  watered  capitalizations  has  been  in 
the  matter  of  franchises.  As  to  the  legality  of  capit- 
alizing franchises  there  are  confused  opinions.  One  of 
the  most  recent  and  skillfully  reasoned  cases  along 
this  line  is  that  by  Judge  Hough  in  the  Consolidated 
Gas  case  cited  above.  Along  one  line  of  unusually 
sound  reasoning  based  upon  facts  and  good  economics 
he  reaches  the  conclusion  that  a  franchise  is  not  a  pro- 
ductive factor  in  earning  wealth  and  is  not  entitled  to 
a  return.  But  then  he  turns  around,  saying  that  it  is 
his  duty  as  a  judge  to  follow  previous  decisions,  and 
upon  an  equally  learned  line  of  reasoning  of  these  cases 
he  finds  that  a  franchise  is  productive  property,  and  so 
productive  that,  in  this  case,  it  is  worth  $12,000,000, 
which  amount  should  be  added  to  the  capital  account 
from  which  a  fair  return  may  be  lawfully  demanded. 
This  two-fold  conclusion  is  well  worth  examining. 


64  MONOPOLY  AND  COMPETITION 

Reasoning  to  the  first  conclusion,  tlie  judge  says  the 
claim  to  demand  a  return  not  only  upon  tangible  assets 
but  also  upon  the  franchise,  the  right  under  which  the 
plant  operates,  is,  as  an  original  proposition,  unsound. 
Return  can  only  be  expected  from  an  investment,  and 
he  that  invests  must  part  with  something.  He  that 
hath  not  sown  shall  not  reap.  The  complainant  did  not 
invest  in  the  franchise  because  it  did  not  pay  for  it. 
The  investment  was  not  made  in  the  franchise  but 
under  it  and  in  faith  thereof.  A  franchise  has  no 
value  in  itself,  no  inherent  value,  and  its  asserted  value 
is  only  a  duplication  of  the  value  of  the  tangible  pro- 
perty operating  under  it.  Such  things  as  land,  money, 
and  chattels,  when  combined  with  industry  and  intelli- 
gence, may  be  made  productive.  But  a  franchise  is 
non-productive.  When  it  is  combined  with  the  above 
productive  qualities,  their  earning  capacity  is  no  greater 
than  before;  for  the  franchise  has  added  no  productive 
power  to  the  reality  or  personality;  it  has  but  author- 
ized their  emplo}'Tnent  in  a  particular  way  and  pro- 
tected the  owners  while  so  employing  them. 

"On  every  private  sale  of  franchise  property,  the 
price  paid,"  the  judge  says,  "is  so  much  money  lost  to 
official  incompetence  or  worse,  and  such  sale  can  confer 
on  the  vendee  no  right  to  compel  the  consumer  to 
repay  him  a  price  which  should  have  been  paid  to  the 
State.  For  these  reasons  I  believe  that  on  principle  a 
franchise  should  be  held  to  have  no  value  except  that 
arising  from  its  use  as  a  shield  to  protect  those  invest- 
ing their  property  upon  the  faith  thereof,  and  that, 
considered  alone  and  apart  from  the  property  which 


CHAPTER  TWO  65 

it  renders  fruitful,  it  possesses  no  more  economic  value 
for  the  investor  than  does  an  actual  shield  possess 
fighting  value,  apart  from  the  soldier  who  bears  it."^^ 

At  this  point  the  argument  changes  to  the  legal  side 
wherein  the  judge  continues:  "It  is  familiar  doctrine 
that  private  citizens  may  acquire  vested  property- 
rights  through  a  series  of  even  erroneous  decisions; 
rights  so  firmly  vested  that  it  becomes  unconstitutional 
for  the  court  which  persisted  in  error  to  suddenly  rec- 
tify its  mistakes  to  the  detriment  of  those  who  had 
securely  rested  upon  the  decisions  sought  to  be  invali- 
dated. In  this  case  I  am  compelled  to  the  conclusion 
that  it  is  necessary  to  allow  the  discoverable  value  of 
complainants'  franchise  as  a  part  of  that  capital  upon 
which  a  fair  return  must  be  allowed,  because  to  refuse 
would  disregard  views  expressed  by  higher  courts 
regarding  the  general  nature  of  franchises  and  regu- 
lation of  proceedings." 

It  is  thus  because  of  "views  expressed  by  higher 
courts"  that  franchises  are  valuable.  And  because  of 
this  the  judge,  after  reviewing  a  long  line  of  cases, 
feels  himself  compelled  to  consider  franchises  "not  only 
as  property  but  as  productive  and  inherently  valuable 
property."  Therefore,  he  finds  the  franchise  in  this 
case  to  be  worth  $12,000,000  which  he  adds  to  the 
capital  account  upon  which  complainant  is  allowed  to 
charge  rates  so  as  to  yield  a  profit  of  sL\  per  cent. 

Hence  the  argument  is  essentially  that  "upon  prin- 
ciple" the  franchise  is  non-productive,  has  no  economic 
value,  and  should  therefore  not  be  allowed  to  yield  a 
"  157  Fed.  873-4. 


66  MONOPOLY  AND  COMPETITION 

return;  but  upon  law,  "erroneous  decisions,"  and  in 
order  not  so  "suddenly  to  rectify"  previous  mistakes 
which  investors  had  considered  valid,  the  "franchise  is 
productive  and  inherently  valuable  property." 

The  argument  upon  law  seems  to  have  so  much  right 
that,  where  the  courts  and  legislatures  have  made  mis- 
takes and  the  people  have  taken  the  decisions  as  valid 
and  built  a  definite  commerce  upon  them,  they  should 
not  rectify  these  too  suddenly  but  bring  about  the 
correction  gradually  so  as  to  give  the  people  time  to 
make  the  necessary  readjustments  without  too  serious 
losses.  Now  it  appears  that  the  Consolidated  Gas 
Company  had  at  one  time  capitalized,  under  the  legal 
sanction  of  the  State,  its  franchises  to  the  amount  of 
about  $7,000,000.  But  Judge  Hough  increased  this  to 
$12,000,000,  his  argument  being  that  the  intangible 
assets  may  be  taken  as  increasing  in  the  same  propor- 
tion as  the  real  estate  or  tangible  assets.  This  cer- 
tainly is  following  the  policy  of  not  "suddenly  to  rectify 
mistakes";  but  one  fails  to  see  why  a  retaining  of  the 
old  capitalization  would  not  have  been  a  better  step 
towards  a  correction  of  them. 

To  us  Judge  Hough's  argument  "upon  principle" 
seems  wholly  conclusive.  A  franchise  is  not  a  factor 
in  production.  When  combined  with  land,  capital,  and 
good  managerial  ability,  it  adds  nothing  to  their  econ- 
omic products.  It  is  simply  a  license  to  certain  indi- 
viduals for  carrying  on  a  public  business  under  specific 
conditions,  conferring  upon  the  grantee  the  protection 
of  the  law,  and,  in  case  of  municipal  public  service 
companies,  its  protection  against  injury  and  loss  by 


CHAPTER  TWO  67 

competition,  giving  them  the  power  of  monopoly  in  their 
special  locations.  Because  it  is  a  license  from  the 
State  to  perform  a  public  function,  it  should  not  be 
made  a  subject  of  commerce;  for  this  is  allowing  pri- 
vate individuals  to  confer  public  rights  and  privileges. 
This  is  politically  objectionable,  for  a  private  individ- 
ual may  not  select  a  person  that  is  acceptable  to  the 
State.  Besides,  in  a  democracy  the  people  have 
reserved  in  their  sovereign  the  right  of  conferring  public 
rights  and  privileges.  If  the  sovereign  confers  this 
power  upon  private  individuals  without  his  subjects' 
consent,  it  is  a  violation  of  his  trust  and  appears  quite 
as  dangerous  as  it  would  be  to  allow  a  license  to  marry 
to  be  made  a  subject  of  commerce,  or  for  a  mayor  of  a 
city  to  sell  his  office  to  one  of  his  friends. 

In  addition  to  the  political  objections  to  making  a 
franchise  a  subject  of  commerce,  there  are  objections 
of  common  sense.  A  public  business  is  usually  profit- 
able, especially  when  it  is  a  monopoly.  To  have  the 
State  pay  a  public  servant  for  the  privilege  of  licensing 
him  to  carry  on  a  profitable  business  is  contrary  to 
good  business  sense.  In  private  business,  if  one  indi- 
vidual confers  upon  another  the  privilege  of  conducting 
a  profitable  business,  the  grantee  must  pay  for  it,  usu- 
ally in  the  form  of  rent.  If  the  grantee  should  get  his 
privilege  free,  he  would  have  good  reason  to  be  grate- 
ful and  it  is  unlikely  that  he  would  ask  the  grantor  to 
pay  him  for  the  privilege  of  giving  him  gifts.  There 
is  no  reason  why  democracies  and  their  officers  should 
not  exercise  as  much  common  sense  as  the  average 
man  in  ])rivate  business.     If  they  should  do  so,  we 


68  MONOPOLY  AND  COMPETITION 

would  have  no  more  merchandizing  in  franchises.  In- 
stead of  having  the  State  pay  the  pubHc  servant  for 
the  privilege  of  giving  him  gifts,  we  should  have  the 
payments  made  in  the  other  direction;  and  I  believe 
we  should  find  many  business  men  willing  to  pay  for  a 
Ucense  to  carry  on  a  profitable  business,  especially 
when  it  is  a  monopoly  and  so  is  protected  against 
injury  and  loss  by  competition. 

When  the  Supreme  Court  heard  the  Consolidated 
Gas  case,  it  apparently  appreciated  the  force  of  Judge 
Hough's  argument  upon  principle.  It  reduced  the 
value  of  the  franchise  to  its  former  capitalization  of 
$7,000,000,  and  allowed  this  to  be  added  to  the  capital 
account  as  a  special  case,  since  the  State  had  permitted 
this  capitalization  and  could  not  therefore  take  it  back 
again.  It  must  bear  the  consequences  of  its  own  mis- 
takes. That  the  franchise  had  a  capital  value  solely 
on  this  account  is  evident  from  the  reasoning  of  the 
court.  Aside  from  such  circumstances,  we  may  take  it 
for  granted  that  the  Supreme  Court  recognizes  no 
capital  value  for  franchises.  And  it  is  worth  while 
mentioning  that  in  a  very  recent  case,  January  1911, 
before  the  Supreme  Court  of  California,  that  for  fran- 
chises and  also  "going  value"  to  have  capital  value  it 
was  ruled  that  it  is  necessary  "to  furnish  data  showing 
that  these  elements  had  a  distinct  independent,  pro- 
ductive value,  before  such  value  could  be  included." 
It  is  scarcely  necessary  to  say  that  these  data  were  not 
furnished.  Thus,  finally,  we  have  a  court  basing  value 
upon  principle,  expressing  no  regard  for  the  precedent 
of  erroneous  decision. 


CHAPTER  TWO  69 

The  ruling,  or  at  least  the  tendency,  of  the  courts  is, 
then,  to  recognize  that  only  that  which  has  distinct 
productive  value  can  be  included  in  the  capital  account 
upon  which  a  fair  return  may  be  lawfully  expected. 
Capital  must  represent  some  tangible  investment,  and 
in  investing  the  investor  must  part  with  something, 
either  money  or  money's  worth.  Such  items  as  loca- 
tion, good  will,  going  value,  and  good  management 
have  value  only  in  so  far  as  they  affect  earnings  and, 
as  such,  are  justly  included  in  the  market  or  sale  value 
of  a  business  or  provided  for  in  the  rate  of  profit,  but 
are  not  included  in  the  basic  valuation  by  which  the 
reasonableness  of  rates  are  to  be  determined.  Good 
will  exists  only  in  a  competitive  business,  and  a  fran- 
chise should  have  neither  market  nor  capital  value,  but 
is  the  peculiar  right  of  the  sovereign  who  is  entitled  to 
all  its  benefits  beyond  a  fair  wage  to  the  public  servant. 

Section  IV.  How  the  Courts  have  Determined  a  Fair 
Profit. 

What  constitutes  a  fair  return  is  more  difficult  than 
what  is  a  fair  capitalization  upon  which  to  base  that 
return.  Upon  this  point  the  courts  have  ruled  that  it 
should  depend  upon  the  degree  of  risk;  that  a  business 
is  entitled  to  a  larger  return  than  a  mere  investment, 
such  as  in  government  bonds,  because  of  the  greater 
risk;  that  the  rate  of  return  upon  any  one  business 
should  be  determined  by  what  investors  usually  expect 
and  receive  in  other  businesses  in  the  same  locality 
involving  an  equal  amount  of  risk.^^  And  six  per  cent 
'» Consolidated  Gas  Company  v.  City  of  New  York,  157  Fed.  871 ; 
B/c^.,  212  U.S.,  p.  49. 


70  MONOPOLY  AND  COMPETITION 

has  been  considered  a  fair  return  for  a  public  service 
corporation  in  New  York. 

The  objection  might  be  made  that  if  all  our  railroads 
had  been  limited  to  this  rate  of  return,  not  a  single 
railroad  could  have  been  built  in  the  United  States; 
that  originally  railroad  securities  were  a  doubtful  invest- 
ment and  that,  therefore,  bonds  for  construction  had  to 
be  sold  at  a  large  discount,  and  besides  much  bonus 
stock  had  to  be  given;  that  a  railroad  requires  several 
years  to  build  and  several  years  more  to  secure  a  regular 
and  permanent  trade;  that  during  these  years  interest 
must  be  paid  on  bonds;  but  it  cannot  be  paid  out  of 
earnings,  since  there  are  none,  and  must  therefore  be 
paid  out  of  the  capital  axcount;  that  because  of  these 
reasons  usually  not  more  than  two-thirds  of  the  par 
value  of  the  bonds  goes  into  actual  construction;  and 
that  the  constitutional  return  upon  the  physical  val- 
uation of  the  railroad's  property  ignores  all  these  pre- 
liminary expenses  without  which  a  railroad  cannot  be 
built. '''■'  To  this  it  need  only  be  replied  that  cost  of  re- 
production by  no  means  necessarily  includes  such  con- 
siderations, and  to  say  what  is  a  fair  return  for  an  estab- 
lished monopolistic  business  is  not  the  same  as  saying 
what  is  a  fair  return  for  a  new  untried  business.  As  the 
Supreme  Court  has  said,  the  rate  of  return  should  be 
proportional  to  the  degree  of  risk  or  safety,  which 
implies  that  a  new  business  should  be  allowed  sufficient 
inducement  to  attract  the  necessary  capital.  But  to 
allow  original  preliminary  expenses  and  risk  to  be  made 
a  permanent  charge  upon  the  capital,  no  matter  how 
"  See  Railroad  Age  Gazelle,  June,  1908,  p.  v36vS. 


CHAPTER  TWO  71 

safe  it  becomes,  is  unnecessary.  The  railway  pion- 
eers should  be  rewarded  for  their  ventures  and  losses; 
but  that  all  future  generation  should  be  made  to  pay 
for  these  risk  strikes  are  as  an  undue  demand  upon 
their  gratitude.  For  such  losses  and  ventures,  a  com- 
paratively large  return  for  the  first  few  years  might  be 
allowed,  but  after  that  it  could  be  limited  to  what  the 
public  regards  as  a  fair  return  upon  the  invested  capital. 

Section  V.  Factors  Determining  the  Development  of 
Judicial  Opinions  upon  Rate  Charges  and  the  Relation 
of  these  Opinions  to  the  Charging-what-the-trqffic-will- 
bear  and  Cost-of -service  Principles. 

While  the  above  line  of  cases  for  the  determination 
of  a  fair  basis  upon  which  a  fair  rate  may  be  calculated 
is  not  free  from  criticism,  no  one  can  read  them  and 
deny  that  they  do  not  represent  a  sincere  effort  to  meet 
the  demands  of  the  situation  and  solve  the  obligations 
and  problems  put  upon  them  by  considering  railroads  as 
coming  under  public  law.  In  the  beginning,  although 
it  was  agreed  that  a  railroad  is  entitled  to  a  fair  return 
upon  the  value  of  the  property  used  for  the  public 
convenience,  there  was  a  division  as  to  what  consti- 
tutes either  a  fair  return  or  value.  But  since  the 
fairness  of  the  earning  was  in  question,  it  became 
clear  that  this  could  not  be  tested  by  the  value  of  the 
property  if  this  value  itself  was  determined  by  the 
earning,  and,  for  this  reason,  it  was  agreed  that  value 
was  determined  by  cost  of  reproduction.  The  fair- 
ness of  earnings  was  not  settled  by  any  definite  prin- 
ciple   except    local    custom.     These    rulings    are    not 


72  MONOPOLY  AND  COMPETITION 

determined  by  precedent  or  by  what  had  been  for- 
bidden or  enjoined  in  the  past  but  rather  by  the  facts 
of  the  immediate  situation.  They  show  clearly  that 
there  is  no  such  thing  as  the  Law,  fixed,  unchange- 
able, and  eternal,  governing  the  case;  but,  on  the  con- 
trary, the  law  is  something  flexible,  growing,  and 
adaptible  to  immediate  and  practical  conditions.  Of 
course,  there  are  general  rules  governing  all  these  cases, 
and  the  most  fundamental  of  these  is  that  railroads  are 
public  servants,  and  the  aim  of  these  cases  is  to  find 
out  what  is  a  fair  wage  for  them  as  public  servants. 
But  this  general  law  is  itself  flexible  and  allows  differ- 
ent specific  laws  for  different  specific  situations. 

I  have  quoted  rulings  not  fully  in  agreement  with 
the  above  remarks.  The  ruling  of  Judge  Hough  on 
franchise  is  an  instance.  This  opinion  represents  the 
conflict  between  precedent  and  fact  in  the  mind  of  an 
individual  judge,  a  conflict  which  is  usually  repre- 
sented by  different  individuals.  On  the  one  hand, 
Hough  is  constrained  to  follow  law  and  precedent, 
even  the  precedent  of  erroneous  decisions.  On  the 
other  hand,  he  is  constrained  to  foUow  principle  and 
fact.  In  so  far  as  he  follows  the  former,  he  is  merely 
making  additions  to  erroneous  decisions  and  creating 
confusion  in  the  situation  with  which  he  is  dealing. 
In  so  far  as  he  follows  principle  and  fact,  he  reaches  a 
conclusion  which  is  new,  constructive,  and  in  the  inter- 
est of  the  public.  The  opinion  shows  clearly  on  which 
side  progress  and  construction  is  made. 

Put  in  a  general  form  what  the  decisions  viewing  the 
railroads  as  governed  by  public  law  come  to,  is  that 


CHAPTER  TWO  73 

the  fairness  of  rate  charges  is  determined  by  cost  of 
service.  On  the  other  hand,  those  defending  rate  dis- 
criminations and  viewing  the  railroad  business  as  pri- 
vate, argue  in  agreement  with  the  principle  that 
charging  what  the  traffic  will  bear  gives  a  fair  rate. 
What  I  wish  to  make  clear  on  the  one  hand,  is  the 
necessity  of  charging  what  the  traffic  will  bear  in  a  com- 
petitive business,  and,  on  the  other  hand,  the  equal 
necessity  of  the  cost-of-service  principle  in  a  monopo- 
listic and  public  business.  Each  principle  functions 
satisfactorily  in  its  proper  situation.  If  carriers  are 
in  free  and  open  competition,  it  is  supposed  in  theory, 
as  well  as  in  practice,  that  each  of  them  will  make 
the  rate  the  lowest  possible  in  order  to  get  the  largest 
possible  volume  of  business.  That  is,  each  carrier, 
because  of  the  force  of  competition,  will  make  the 
rate  as  low  as  the  cost  of  service  profitably  allows. 
But,  if  a  carrier  has  a  monopoly,  then,  charging  all 
that  the  traffic  will  bear,  becomes  a  principle  of 
extortion.  Before  a  consumer  will  do  without  shoes 
or  a  coat  or  bread,  he  will  pay  the  highest  rate  his 
earnings  will  bear,  and,  under  these  conditions,  the 
carrier  has  power  to  extort  most  of  his  earnings  that 
are  not  necessary  for  a  living.  That  is,  he  has  the 
power  to  reduce  the  consumer  to  a  condition  of  servi- 
tude. A  principle  allowing  such  a  result  would  be 
condemned  as  not  functioning  satisfactorily,  at  least 
not  to  the  satisfaction  of  the  public.  In  a  monopoly, 
then,  the  old  rule  of  competition  is  a  failure,  and  the 
question  is  how  much  should  the  traffic  fairly  bear,  a 
question  which  cannot  be  answered  except  by  reference 


74  MONOPOLY  AND  COMPETITION 

to  the  cost  of  service,  because  the  check  of  competition 
has  been  removed.  It  is  for  this  reason  that  recent 
decisions  have  approved  the  cost-of-service  principle. 
The  early  decisions  that  applied  the  common  law  to 
the  public  carrier  made  the  common  mistake  of  apply- 
ing old  rules  to  changed  conditions  that  required  new 
rules. 


CHAPTER  III 

The  Change  from  Private  to  Public  Morals  with 
Large  Industrial  Combinations 

Section  I.  The  Effect  of  the  Adoption  oj  the  Methods 
and  Practices  of  Private  and  Competitive  Business  by 
Large  Industrial  Corporations. 

In  Chapter  I,  we  pointed  out  the  result  of  carriers 
bargaining  privately  with  combinations  and  of  adopt- 
ing a  principle  of  charging  what  the  traffic  will  bear, 
which  is  the  competitive  principle  of  charging  all  you 
can  get  as  applied  to  transportation.     In  this  chapter 
I  shall  take  up  this  principle  as  applied  to  the  sale  of 
commodities  and  show  the  results  of  it  when  adopted 
by  combinations  and  applied  in  a  way  that  is  common 
between  individual  traders  in  competition.     It  must 
be  remembered  that  this  principle  means  low  prices  at 
competitive  points  and  high  prices  at  noncompetitive 
points  through  which  the  losses  on  the  former  are 
recouped.     This  system  of  charging  is  local  discrim- 
ination when  adopted  by  a  single  individual  or  com- 
bination.    As  adopted  by  combinations,  it  has  been 
an  important  cause  of  monopoly,  although  this  is  little 
understood  by  the  public.     It  will,  however  be  made 
clear  by  telling  what  the  practice  has  meant  to  the  two 
monopolies  recently  ruled  upon  by  the  Supreme  Court, 
viz.,  the  American  Tobacco  and  Standard  Oil  monop- 
olies. 


76  MONOPOLY  AND  COMPETITION 

An  illustration  of  one  of  the  methods  of  the  American 
Tobacco  Company  for  killing  competition  is  supplied  by 
the  story  of  its  fight  against  the  NashviUe  Tobacco 
Works.  The  latter  company  had  been  doing  a  pros- 
perous business  for  about  fifteen  years.  Its  leading 
brand  was  a  3  by  12  dark  plug  called  "Old  Statesman." 
Against  this,  the  American  Tobacco  Company  put  out 
another  dark  plug,  of  the  same  size,  weight,  and 
quality,  called  "Bulls  Head."  Old  Statesman  sold 
regularly  for  39  cents  a  pound,  but  by  a  scheme  of  dis- 
count Bulls  Head  sold  for  16  cents  a  pound,  a  price 
below  cost  of  manufacture.  The  business  of  the  Nash- 
ville company  soon  began  falling  off;  and  by  the  end  of 
18  months,  its  owners  became  convinced  that  they 
must  either  sell  or  lose  aU.  Accordingly,  their  plant 
was  secretly  sold  to  the  American  Tobacco  Company.^ 

This  was  a  common  mode  of  procedure  for  the  Ameri- 
can Tobacco  Company,  which  could  well  afford  to  sell 
one  of  its  brands  below  cost  in  a  competitive  territory, 
for  in  numerous  other  places  it  had  a  monopoly  which 
more  than  offset  the  loss.  But  the  competitor,  being 
confined  to  a  comparatively  narrow  territory,  could  not 
recoup  himself  in  this  manner  and  so  had  to  give  up, 
even  though  he  could  manufacture  just  as  cheaply 
as  his  conqueror. 

The  American  Tobacco  Company  defended  this 
scheme  by  pleading  that  it  carried  on  its  business  in  its 
own  way  without  reference  to  competitors.  Their 
destruction  was  only  incidental.  What  the  consumer 
wanted  was  not  the  tobacco  but  the  brand.  However, 
'  Puryear,  IV,  165-181. 


CHAPTER  THREE  77 

to  introduce  a  new  brand,  it  had  to  be  sold  at  low 
prices.  If  the  American  Tobacco  Company  occa- 
sionally sold  at  low  prices,  it  was  merely  to  get  a  new 
brand  on  the  market.  However,  one  may  interpret  the 
defense  of  the  scheme,  it  cannot  be  denied  that  its 
objective  effect  was  the  killing  of  competition  and  the 
establishment  of  a  monopoly. 

But  possibly  the  clearest  illustration  of  local  price- 
cutting,  is  found  in  the  history  of  the  Standard  Oil 
Company.  In  the  previous  chapters,  I  described 
briefly  how  the  Standard  gained  its  monopoly  largely 
through  advantages  in  transportation.  But,  after  its 
monopoly  had  been  established,  local  price-cutting  was 
the  principal  method  of  maintaining  it. 

In  the  footnote  below  I  present  a  table  showing  the 
price  of  Standard  Oil  in  each  of  the  states,  and  the 
lowest  prices  in  each  as  taken  from  the  United  States 
Report  on  the  Petroleum  Industry,  1907.  It  will  be 
seen  that  the  price  of  oil  is  7.7  cents  per  gallon  in 
Deleware,  8.5  cents  in  Ohio,  8.7  cents  in  Pennsylvania, 
and  8.9  cents  in  Connecticut;  but  14  cents  in  Oklahoma, 
15.7  cents  in  Washington,  16.4  cents  in  Nevada,  and 
16.6  in  Colorado.  Here  the  low  and  high  prices  are  in 
widely  separated  geographical  points.  But  the  conspic- 
uous differences  are  also  found  within  the  same  state. 
For  example,  in  Massachusetts  the  price  is  7.4  cents  at 
Blackstone  and  10.9  cents  at  Plymouth;  in  Louisiana 
7  cents  at  New  Orleans  and  15.5  cents  at  Payne;  and, 
in  New  Mexico,  9.6  cents  at  Lascruces  and  22.8  cents 
at  Charma.  Sometimes  a  river  or  a  street  between  two 
purchasers  is  sufficient  to  make  a  difference  in  the 


78 


MONOPOLY  AND  COMPETITION 


price  of  oil.^  In  Windsor,  Mass.,  oil  sold  at  8  cents 
but  at  Windsor  Hill,  across  the  river,  it  sold  for  9  cents. 
In  Windsor  Locks,  Conn.,  the  American  Whiting 
Paper  Company  paid  93^  cents  but  the  grocery  stores 
in  the  same  town  paid  only  73^^  cents.^  In  Pittsfield, 
Mass.,  the  Standard  tank-wagon  driver  offered  to  fill 
the  tanks  of  two  merchants  free  of  charge,  but  other 
merchants  he  charged  l}/2  cents  a  gallon.* 

Table  I,  showing  price  of  oil  in  states  and  towns  of  various 
sizes  in  the  U.  S. 


State 


Maine 

New  Hampshire 

Vermont 

Massachusetts 

Rhode  Island 

Conneticut 

New  York 

New  Jersey 

Pennsylvania 

Delaware 

Maryland,  District  of  Columbia. 

West  Virginia 

Virginia 

North  Carolina 

South  Carolina 

Georgia 


Average 

Lowest 

for 

price 

state 

per 

gal. 

(cents) 

(cents) 

10.4 

9.5 

10.3 

9.8 

9.0 

8.0 

9.9 

7.4 

9.6 

8.4 

8.9 

7.9 

10.0 

8.3 

9.8 

8.3 

8.7 

8.0 

7.7 

6.9 

9.2 

8.2 

9.0 

8.1 

9.7 
10.3 
10.8 
11.6 

7.3 

8.0 

10.0 

8.2 

Highest 
price 
per 
-gal. 

(cents) 

11.3 
10.8 
00.2 
10.9 

9.9 

9.8 
11.6 
11.3 
10.6 

8.7 
10.1 

9.5 
10.7 
11.9 
12.1 
13.4 


=  Hisgen,  Record,  4/1820-1. 

'Hisgen,  Record,  IV/1820-1. 

*  Record,  Dean,  4/1895;  Mandigo,  4/1963-66;  Couch  4/1968. 


CHAPTER  THREE 


79 


Table  I   Continued 


State 


Florida 

Ohio 

Indiana 

Illinois 

Michigan 

Wisconsin 

Minnesota 

Iowa 

Missouri 

North  Dakota 

South  Dakota 

Nebraska 

Kansas 

Kentucky 

Tennessee 

Alabama 

Mississippi 

Louisiana 

Arkansas 

Indian  Territory. 

Oklahoma 

Texas 

Montana 

Idaho 

Wyoming 

Colorado 

New  Mexico 

Arizona 

Utah 

Nevada 

Washington 

Oregon 

California 


Average 

for 

state 

(cents) 

12.8 

8.5 

9.5 

9.1 

9.0 

9.2 

9.6 
10.2 
10.9 
11.1 
12.9 
10.5 
11.4 

9.4 
11.6 
11.6 

9.8 

9.5 
13.9 
12.5 
14.0 
11.6 
15.6 
15.6 
15.6 
16.2 
13.2 
10  7 
14.8 
16.4 
15.7 
15.3 
11.1 


Lowest 

price 

per 

gal. 

(cents) 

11.5 
6.4 

7.7 

7.5 

7.7 

7.2 

7.8 

8.7 

9.0 

10.3 

10.3 

8.8 

8.7 

6.4 

8.8 

9.7 

7.7 

7.0 

8.9 

10.9 

13.1 

9.0 

12.7 

13.6 

13.5 

14.3 

9.6 

14.1 

14.0 

14.0 

6.1 


Highest 

price 

per 

gal. 

(cents) 

13.9 
11.2 
10.5 
11.5 
10.7 
11.2 
12.0 
11.2 
16.4 
11.5 
16.8 
12.8 
13.0 
10.7 
13.0 
13.0 
12.3 
15.5 
16.5 
14.1 
14.3 
14.8 
17.6 
18.8 
16.9 
23.4 
22.8 

16.0 

17.8 
17.7 
14.5 


80  MONOPOLY  AND  COilPETITION 

Table   I    Continued 

Total  number  of  states 49 

Total  number  of  states  reporting   both   lowest   and   highest 

price 47 

Computed  from  tables  146,  143,  132,  U.  S.  Report  on  the  Petro- 
leum Industrj',  1907. 

What  was  the  cause  of  this  great  variety  in  prices 
which  the  Standard  charges  ?  The  fact  that  oil  sold  for 
9.3  cents  per  gallon  more  in  Nevada  than  in  Delaware 
makes  one  wonder  whether  the  difference  might  not 
have  been  due  to  geographical  conditions,  possibly  to  a 
greater  cost  of  marketing  or  of  refining,  or  it  might 
have  some  relation  to  the  density  of  population.  But 
when  geograpliical  differences  are  reduced  to  such 
narrow  limits  as  a  river  or  a  street,  and  when  the 
same  oil  out  of  the  same  tank-wagon  was  sold  at  greatly 
varying  prices,  one  becomes  suspicious  of  the  adequacy 
of  such  explanation  and  is  inclined  to  look  for  some 
other  principle,  possibly  competition. 

Transportation  charges  do  not  explain  the  variety 
in  the  prices  quoted  because  they  have  been  previously 
deducted.  Refining  costs  are  no  sufficient  explanation, 
because  the  variety  is  the  same  in  the  prices  of  oil  from 
the  same  refinery.  For  example,  oil  from  the  refinery 
at  Whiting,  Indiana,  sold  for  9  cents  in  Michigan  and 
for  13.7  cents  in  Araknsas;  oil  from  the  refinery  in 
Richmond,  Cal.,  sold  for  7.2  cents  in  Southern  Cali- 
fornia and  for  15.7  cents  in  Washington.^  Marketing 
costs  explain  part  of  the  variety  in  different  localities, 
but  in  no  case  a  greater  difference  than  1.86  cents  a 

'  S.  II,  Table  133. 


CHAPTER  THREE  81 

gallon,  which  amount  represents  the  difTerencc  between 
the  markctmg  costs  in  Southern  California,  1.36  cents 
a  gallon,"  and  3.22  cents  a  gallon,  the  cost  in  South 
Texas.  Density  of  population,  of  course,  can  explain 
nothing  in  itself.  If  this  makes  any  difference,  it  must 
affect  either  marketing  costs  or  competition.  But  what 
marketing  costs  explain  is  already  stated.  It  remains 
to  consider  competition. 

In  the  footnote  below,  two  tables  are  presented 
showing  the  relation  between  marketing  costs  and 
margins  on  the  one  hand,  and  the  amount  of  competi- 
tion on  the  other.  Table  II  gives  the  prices  and  mar- 
gins on  oil  in  23  towns  where  the  Standard  had  no  com- 
petition, and  those  in  12  towns  which  had  from  30  to 
50  per  cent  competition.  In  the  23  towns  having  no 
competition,  the  average  price  is  12.87  cents  a  gallon 
and  the  average  marginal  gain  is  2.52  cents.  But  in  the 
12  towns  which  had  competition,  the  average  price  was 
only  9.09  cents  while  there  is  a  marginal  loss  of  .08 
cents  a  gallon.  Table  III  gives  the  margins  and  the 
per  cents  of  competition  at  22  main  and  substations  of 
the  Standard  Oil  Company.  The  Standard  generally 
has  a  main  station,  for  the  storage  and  delivery  of  oil, 
in  some  large  city.  From  this  it  supplies  sub-stations 
in  smaller  neighboring  towns.  Frequently  it  happens 
that  there  is  considerable  competition  at  the  main 
station  while  there  was  little  or  none  at  the  sub-station. 
In  20  out  of  the  22  sub-stations  named,  the  table  shows 
that  where  competition  is  higher  at  the  main  than  at 
the  sub-station,  the  margin  is  correspondingly  lower, 

« Ibid.,  Table,  134. 


82 


MONOPOLY  AND  COMPETITION 


and  in  a  number  it  was  less  than  nothing.  These  results 
point  clearly  to  the  conclusion  that  competition  is  the 
cause  of  the  various  prices  which  the  Standard  Oil 
Company  charged  for  its  oil. 

Table  II,  showing  price  and  margins  on  oil  according  to  degree 
of  competition. 


Towns  having  no  competition 


Brockton,  Mass 

Fall  River,  Mass 

L>Tin,  Mass 

Providence,  R.  I 

Altoona,  Pa 

Columbia,  S.  C 

Atlanta,  Georgia 

South  Bend,  Ind 

Grand  Rapids,  Mich. 

Mankato,  Minn 

Davenport,  Iowa 

St.  Joseph,  Mo 

Fargo,  S.  D 

Nashville,  Tenn 

Denver,  Col 

Leadville,   Col 

Pueblo,  Col 

Seattle,  Wash 

Spokane,  Wash 

Tacoma,  Wash 

Portland,  Ore 

Sacramento,  Cal 

San  Diego,  Cal 


Cents 

Per 

gallon 

Price 

Mar- 
gin 

11.0 

2.18 

10.5 

2.15 

11.0 

2.61 

10.0 

1.21 

11.0 

2.98 

13.0 

2.27 

13.0 

1.98 

10.0 

1.90 

9.5 

1.14 

11.5 

2.24 

10.0 

.75 

11.0 

1.52 

13.5 

2.10 

12.0 

2.11 

16.0 

3.39 

20.0 

5.47 

16.0 

3.38 

15.5 

4.17 

21.5 

6.10 

15.5 

3.99 

15.0 

4.12 

13.0 
9.5 

2.45 

1.30 

Averages 


12.87      2.62 


CHAPTER  THREE 


83 


Towns  having  30-50%  compclition 


Birmingham,  N.  Y.. 

Pittsburgh,  Pa 

Toledo,  Ohio 

Peoria,  III 

La  Crosse,  Wis 

Milwaukee,  Wis 

Wichita,  Kans 

Los  Angeles,  Cal 

Cincinnati,  Ohio 

Minneapolis,  Minn. 
Des  Moins,  Iowa  ... 
New  Orleans,  La 


Averages 


Cents  Per 

gallon 

Price 

Mar- 
gin 

9.5 

1.00 

8.5 

.87 

9.5 

1.63 

9.0 

.35 

9.0 

.17 

8.5 

.65 

10.0 

.48 

7.5 

-3.16 

7.0 

1.09 

9.5 

.24 

10.75 

.53 

9.5 

1.35 

9.09 


.03 


Computed  from  Record,  Petitioners'  Exhibits,  390. 


84 


MONOPOLY  AND  COMPETITION 


Table  III,  showing  prices  and  margins  of  oil  at  main  and  sub- 
stations in  relation  to  competition. 


Division 


Baltimore 

Cincinnati 

Cleveland 

Decatur 

Des  Moines 

Dubuque 

Duluth 

Evans^dlle 

Indianapolis 

Kansas  City 

La  Crosse 

Louisville 

Memphis 

Minneapohs 

New  Orleans 

Omaha 

Peoria 

Richmond 

Sioux  City 

Springfield,  Mass. 

Wichita 

Worcester 


Cents  Margin 

Percentage  of 

at 

competition 

Main 

Sub- 

Main 

Sub- 

stas. 

stas. 

stas. 

stas. 

0.09 

1.36 

16.5 

7.1 

(1.09) 

0.65 

45.3 

7.2 

(0.16) 

1.68 

11.7 

20.0 

0.08 

1.66 

12.9 

4.6 

0.53 

1.47 

41.8 

12.7 

(0.19) 

1.88 

55.1 

10.3 

0.88 

2.52 

9.9 

4.6 

0.05 

1.30 

29.0 

10.4 

0.12 

1.02 

22.0 

9.0 

0.27 

1.71 

24.2 

3.8 

0.17 

1.82 

38.6 

1.5 

(0.38) 

1.42 

16.1 

3.7 

0.18 

2.10 

27.6 

4.5 

0.24 

1.52 

41.8 

0.7 

(1.35) 

0.46 

51.2 

6.5 

0.41 

1.32 

21.7 

5.3 

0.55 

1.68 

31.2 

12.9 

(0.27) 

2.03 

12.0 

5.5 

0.44 

1.87 

23.6 

5.4 

(0.88) 

1.19 

21.7 

8.6 

0.48 

2.63 

32.1 

3.6 

0.08 

1.45 

5.0 

6.5 

Computed  from  Record,  Petitioners'  Exhibit  634. 

At  this  point,  it  will  be  interesting  to  see  how  the 
method  of  price-cutting  worked  in  the  concrete.    A 
few  illustrations  will  make  the  process  clear. 

In  the  early  part  of  1900,  Hisgen  Brothers  erected 
storage  tanks  in  Albany,  N.  Y.,  for  the  purpose  of 


CHAPTER  THREE  85 

going  into  the  oil  business.  When  this  fact  became 
known,  the  Standard  at  once  dropped  the  bottom  out 
of  the  prices.  Oil  declined  from  12  cents  a  gallon  to 
S}4,  8  and  7  cents.  Hisgen  Brothers  could  not  meet 
these  prices  and  had  to  refrain  from  marketing  oil  in 
Albany  for  two  years.'  In  the  meantime,  they  began 
to  work  the  surrounding  towns.  In  these  places,  oil 
was  high  and  they  could  market  it  at  a  good  profit.^ 
When  they  sold  in  a  town  to  some  particular  dealers, 
the  Standard  men  would  soon  visit  these  dealers,  cut 
the  prices  to  them,  but  maintain  the  high  price  to  the 
others  not  visited  by  the  Hisgens. 

In  1901  one  of  the  Hisgens  made  a  trip  down  the 
Hudson  and  visited  the  towns  along  the  river.  Here 
he  found  oil  selling  between  3  and  4  cents  higher  than 
in  Albany.  He  sold  oil  to  the  dealers  at  their  Albany 
price  plus  the  cost  of  freight,  his  selling  point  being 
that  if  they  would  give  him  an  order,  the  Standard 
would  soon  sell  to  them  cheaper.  His  prophecy  proved 
true,  for,  immediately  after,  a  Standard  man  visited 
those  dealers  and  lowered  the  price.  Hisgen  was  able 
to  sell  to  a  dealer  once  or  twice  but  after  that  the  trade 
went  back  to  the  Standard  because  of  the  low  price. ^ 
Therefore,  the  Hisgens  had  to  go  into  new  territory 
and  repeat  the  same  experiences.  After  their  visit, 
the  prices  would  always  fall  two  or  three  cents  a  gal- 
lon and  in  many  cases  the  Hisgens  had  to  drop  out  of 
a  town.     In  some,  where  the  people  had  the  good  sense 

'Record,  9/1947. 

» Record,  4/1803-0-1. 

"Record,  4/1813-15;  4/1977-78. 


86  MONOPOLY  AND  COMPETITION 

to  appreciate  competition,  they  could  hold  the  trade 
at  a  higher  price  than  the  Standard's.  For  example, 
when  the  Hisgens  entered  Springfield,  Mass.,  oil  was 
selling  at  12^  cents  per  gallon;  but,  in  a  few  weeks, 
the  price  went  down  to  9  cents  and  then,  3^  cent  at  a 
time,  until  it  reached  7  cents.  The  Hisgens  met  the 
cut  until  it  reached  73^  cents,  and,  at  that  price,  they 
appealed  to  the  trade  to  stand  by  them.  The  dealers 
did  so,  since  they  appreciated  that  the  prices  were 
lower  than  they  would  be  in  case  of  no  competition. ^° 

By  1902  the  prices  in  Albany  had  again  gone  up  to 
about  9  or  10  cents.  When  the  Hisgens  again  began 
to  sell  oil  in  Albany,  the  price  again  dropped,  to  6  and 
63^2  cents. ^^  The  Hisgens,  however,  kept  on  at  l}/2 
cents.  To  a  customer  of  the  Hisgens  the  Standard 
now  made  individual  cuts  in  an  attempt  to  take  the 
trade  away  from  them.  To  one,  Winnie, ^^  they  made 
a  cut  of  }/2  cent  a  gallon,  but  Winnie,  appreciating  the 
value  of  competition,  refused.  To  another,  Ahearn,^^ 
they  made  a  cut  of  2  cents  below  the  prevailing  price 
for  six  months  and  succeeded. 

Another  town  in  which  the  Standard's  method  of 
price-cutting  is  characteristically  illustrated  is  Augusta, 
Georgia,  where  the  Standard  disposed  of  four  competi- 
tors one  after  the  other.  On  the  first  man  to  begin 
competition,  namely  J.  T.  Thornhill,  they  cut  the 
price  from  17  to  113^  cents  a  gallon;  and  in  a  year, 

'"Record,  4/1817. 
"  Record,  4/1813-15. 
"^Winnie,  Record,  4/1933. 
"  Ahearn,  Record,  4/1970-72. 


CHAPTER  THREE  87 

ready  to  quit,  he  moved  away."  The  next  competitor 
was  Blodgett,  Moore,  and  Co.,  that  opened  a  branch  in 
August  about  1888.  After  withstanding  the  Standard's 
price-cutting  for  about  two  years,  this  company  sold 
out  to  them.^''  Afterwards,  the  price  went  up  from 
6^^  and  7}/^  to  14}  2  cents.  When  the  third  indepen- 
dent, the  Tidewater  Oil  Company  of  New  York,  ven- 
tured to  do  business  in  Augusta,  the  Standard  cut  the 
price  on  them  8  cents  a  gallon,  from  about  14  to  6 
cents.  At  the  end  of  about  a  year  and  a  half  they  sold 
out  to  the  Standard  and  moved  away.^^  The  fourth 
company  to  attempt  to  compete  with  the  Standard  was 
Crew,  Sevick,  and  Company.  But  this  was  a  short- 
lived concern,  and  was  finished  up  in  about  a  year, 
after  which  it  too  quietly  moved  away.^''  These  illus- 
trations suffice  to  show  the  Standard's  method  of  price- 
cutting.  A  competitor  comes  into  a  town.  A  cut  in 
price  follows.  The  competitor  goes  out.  The  price 
goes  up  again. 

This  policy  is  well  described  in  the  testimony  of 
Mr.  Boardman,  who  was  at  one  time  an  employee  of 
the  Standard  in  Augusta: 

J.  "What  was  done  when  a  company  would  come 
in  there?" 

A.     "Cut  the  price." 

J.     "How  much?" 

'*  Boardman,  Record,  5/2166. 
"'Ibid.,  5/2166. 
'*  Boardman,  Record,  5/2167. 
"  Ibid. 


88  MONOPOLY  AND  COMPETITION 

A.  "As  much  as  necessary  to  get  the  business. 
It  would  depend  on  what  we  thought  the  other  fellow 
would  be  able  to  do.  .  .  .  Say  they  figured  this  fel- 
low's oil  would  cost  him  12  cents  in  barrels;  they  would 
make  it  113^2 — ^  it  so  that  he  couldn't  sell  oil  at  a 
profit  if  possible.  "^^ 

This  policy  is  still  better  described  by  Mr.  Jennings,  a 
director  of  the  Standard  Oil  Company,  in  a  conversa- 
tion he  had  with  Mr.  Todd,  who  was  competing  with 
the  Standard  in  Troy,  N.  Y.  Mr.  Todd  reported 
their  conversation  in  his  testimony,  and  it  is  so  import- 
ant as  to  be  well  worth  quoting: 

"My  talk  with  Mr.  Jennings  was  that  I  considered 
the  business  ...  we  were  conducting  at  that  time 
,  .  .  a  foolish  one.  After  I  got  through,  he  said:  'The 
argument  you  put  up,  Mr.  Todd,  I  can't  meet  .  .  . 
it  is  all  on  one  side,  but  you  have  got  to  take  into  con- 
sideration that  the  Standard  Oil  Company  have  to 
operate  differently  from  what  a  small  concern  would, 
We  have  got  a  policy  to  pursue  and  that  is  to  make  it 
just  as  difficult  for  an  independent  to  put  out  oil  as 
we  possibly  can;  in  other  words,  we  want  to  drive  them 
out  of  business  if  we  can;  if  we  can't,  why  we  sometimes 
make  a  dicker;  but  our  first  move  is  to  make  it  just  as 
expensive  as  we  can.  Now,'  he  says,  'you  can  readily 
see  this,  because,  if  we  didn't  where  would  we  be  in  a 
few  years?  The  independents  would  have  the  bulk 
of  the  business.'    He  says,  'That  is  our  policy.'  "^^ 

'^Boardman,  Record,  5/2165. 
"Todd,  Record,  6/3215-16. 


Table  IV  —  showing  price  of  oil  in  various  towns  before  and  after  competition  by  Standard,  and  effect  on 
com})etition. 


Town 

Reference 

in 

Record 

Price  pel 

(cen 
before 
competi- 
tion 

r  Gallon 

ts) 
after 

competi- 
tion 

Date 

Result 

to 

Competitor 

■Mbanv.  N.Y 

Hisgen  4/1948 
Hisgen  4/1816 
Hisgen  4/1817 
Hisgen  4/1817 
Hisgen  4/1818-20 
Hisgen  4/1821-24 
Hisgen  4/1826-27 
Dean  4/1892-93 
Dean  4/1895-99 
Mandigo  4/1963-66 
Hisgen  4/1828 
Allen  4/1900 
Todd  6/3216-18 
Messner  20/4^1 
Todd  6/3220-21 
Metzel  5/2413 
Boardman  5/2166 
5/2172 
5/2174 
5/2175 
5/913 
Wooten  5/2096 
Wooten  5/2101 
Wofford  5/2156-57 
Castle  6/3054-57 
Hosslcr  6/2941-43 
Gamerl  6/3134-41 
Hopkins  3/1028-29 
Lederer  3/1044-46 

12 
9,10 

12H 
10,  11 
10,  11 

11 

X 

10,  1014 

8,  8V2 

10 

9 

.\ 

X 

14 

143^ 

12 

15 
15 

X 

13 
14 

X 

12,  10 
12 

X 

20 

8,  Ki,  7 

6,  63^ 
9-7 

7 

7,  IH 

x-lorl3-^ 

6 

y 
0 
6 
9 

IIH 
5 

9 

13,  12,11 
x-2 
10,  8 
6 

X-V2 
12,10,5 

1900 
1902 
1901 

1906 
1905 

1897 
1900 

1898 

1889 

1904 

1906 

1906 

18981 

1897 

1901 

1904 

1900 

1901 

1905 

1898 

Springfield,  Mass 

Continued  at  7J4 

Thomnsonville.  Conn.. 

Continued  at  7J4 

Windsor  Locks,  Mass 

Griffville,  Conn 

Cheshire,  Mass 

Pittsfield,  Mass 

Continued  at  9 

Long  ^leadow.  Mass 

Compromise 

Boston,  Mass 

Compromise 

Trov,  N.  Y 

Binghampton,  N.  Y 

Sold  5  stations  to 

New  Windsor,  Md 

Augusta,  Ga ,. 

Sold  out  to  S. 

Augusta,  Ga 

Continued  at  9,  S.  11 

Atlanta,  Ga 

Denmark,  S.  C 

Continued  12,  S.  at  113^ 

Washington,  Ga 

Driven  out 

Atlanta,  Ga 

Sold  to  S. 

Birmingham,  Ala 

Driven  out,  15  after 
Sold  to  S. 

Cleveland,  Ohio 

Compromise 

Chardon,  Ohio 

Portland,  Mich.. 

Pierce  City,  Mo.... 

Dexter,  Mo 

Driven  out 

'Approximately. 


CHAPTER  THREE  89 

An  idea  of  the  extent  of  the  practice  of  cutting  the 
price  on  the  competitor  may  be  seen  from  Table  IV, 
which  gives  some  instances  as  reported  by  witnesses 
in  the  case  of  the  Standard  Oil  Company  v.  the  United 
States.  This  table  gives  the  prices  before  and  after 
competition  began  in  a  town,  the  date,  and  the  result 
to  the  competitor  when  reported.  It  is  largely  such 
instances  as  these  that  account  for  the  price  variation 
of  Standard  oil.  By  this  time,  our  general  conclusion 
must  be  clear  that  it  is  competition  that  explains  the 
differences  in  the  price  of  Standard  oil  throughout  the 
United  States. 

A  supplementary  method  with  which  the  Standard 
Oil  Company  used  to  meet  cut-price  conditions  was  to 
employ  bogus  independent  companies.  These  were 
operated  by  an  agent  of  the  Standard  who  represented 
himself  to  the  trade  as  an  independent  having  no 
connection  Avith  the  Standard;  but  as  a  matter  of  fact 
he  sold  Standard  oil  and  operated  under  policies  dic- 
tated by  the  refined  oil  department  of  the  Standard. 
The  bogus  company,  after  starting,  usually  cut  the 
price  at  once  so  as  to  get  the  trade  back  to  the  Standard, 
often  taking  advantage,  however,  of  the  very  prejudice 
against  trusts  to  get  this  custom.  It  could  also  make 
rebates  and  concession  in  special  cases.  It  solicited 
in  most  part  the  trade  supplied  by  independents  with 
just  enough  of  the  Standard  trade  to  keep  up  the 
appearance  of  its  supposed  independent  character.  By 
employing  these  bogus  companies,  the  Standard  would 
need  to  lower  prices  only  in  those  particular  districts 
of  a  town  or  territory  where  there  was  competition 


90  MONOPOLY  AND  COMPETITION 

but  could  keep  them  up  elsewhere.  The  Standard  thus 
avoided  the  obligation  of  lowering  its  prices  over  large 
districts  and  met  competition  in  the  least  expensive  way. 
About  60  bogus  companies  were  reported  by  witnesses 
in  the  Standard  Oil  suit.  These  operated  at  com- 
petitive points  in  20  different  states.^'' 

A  second  supplementary  method  which  the  Standard 
used  for  cutting  prices  was  to  give  rebates  to  the  pur- 
chasers of  oil.  The  rebate  was  given  to  a  dealer  or 
peddler  in  consideration  that  he  sell  oil  at  a  low  price 
named  by  the  Standard,  or  that  he  agree  to  buy  his 
supplies  from  the  Standard  for  a  certain  length  of  time, 
or  to  keep  him  from  "going  over  the  line,"  buying  from 
a  competitor.  The  rebates  usually  ranged  from  3^  to 
2  cents  a  gallon.  As  a  rule,  the  dealer  paid  the  open 
market  price  to  the  tank-wagon  man  and  received  his 
rebates  from  "a  sort  of  special  man  in  the  rates  depart- 
ment with  duties  directly  under  the  manager. "^^  A 
third  supplementary  method  employed  by  the  Standard 
for  cutting  prices  was  a  peculiar  system  of  espionage. 
It  would  require  fully  twenty  pages  to  describe  this 
method  with  any  accuracy,  but,  suffice  it  to  say  here, 
it  was  one  of  the  best  organized  departments  in  the 
Standard  Oil  Company.  In  its  New  York  office  alone, 
the  department  which  has  charge  of  this  system  had  a 
force  of  38  clerks.  The  system  was  carried  out  by  means 
of  special  arrangements  not  only  with  Standard  em- 
ployees but  also  with  employees  of  railroads.     Deputy 

2"  Mahle,  Record,  5  /2353.     Also  Petitioners'  Brief  of  Facts- 
Vol.  II,  pp.  115-149. 

='  Castle,  Record,  6/3030. 


CHAPTER  THREE  91 

public  oil  inspectors  frequently  assisted,  and  occasionally 
employees  of  independent  companies.  Judge  Woodson 
of  the  Supreme  Court  of  Missouri,  in  the  course  of  an 
elaborate  opinion  upon  the  Standard  Oil  Company, 
covering  over  450  printed  pages,  describes  the  effects 
of  this  system  as  follows: 

"In  order  to  drive  out  all  competitors  and  drive  out 
the  entire  trade,  they  inaugurated  and  carried  on  a 
perfect  system  of  espionage,  by  which  they  acquired 
complete  knowledge  of  their  competitors'  business,  and 
followed  almost  every  barrel  of  independent  oil  shipped 
over  a  railroad  to  the  very  door  of  the  dealer,  and,  there, 
by  means  of  cutting  prices,  offering  rebates,  misrepre- 
sentation and  deception,  attempted  to  have  the  sale 
countermanded  and  prevent  him  from  purchasing  inde- 
pendent oil  in  the  future.  "^"^  This  brief  statement  must 
be  satisfactory  for  our  present  purposes. 

By  such  methods  as  these,  the  Standard  Oil  Com- 
pany was  able  to  maintain  its  monopoly  of  the  oil 
business.  I  do  not  mean  to  give  the  impression  that 
the  Standard  did  not  also  employ  excellent  technologi- 
cal methods.  It  excells  in  the  latter.  The  Standard's 
competitors,  as  well  as  the  best  of  the  large  corporations, 
have  much  to  learn  from  the  Standard  in  the  way  of 
technological  excellence  and  sound  economic  manage- 
ment. Nor  do  I  intend  to  give  the  impression  that  the 
Standard  alone  practiced  these  competitive  methods. 
I  chose  the  Standard  as  an  example  for  showing  gen- 

=«  Stale  ex  inf.  v.  Standard  Oil  Co.,  218  No.  1,  444.  For  system 
see  Petitioners'  Brief  of  Facts,  Vol.  IF,  ])p.  358-428.  For  the  case 
see  St.  Oil  Co.  v.  U.  S.,  22  1  U.  S.,  1. 


92  MONOPOLY  AND  COMPETITION 

eral  practices  prevailing  in  corporate  business,  with  the 
hope  of  making  clear  their  significance  to  the  public 
welfare,  namely,  the  establishing  of  a  monopoly  when 
practiced  by  a  large  combination  against  small  traders. 
If  this  is  their  effect  the  question  is  whether  such 
methods  are  unfair.  If  so,  how  shall  we  draw  the  line 
between  fair  and  unfair  competition?  These  questions 
will  be  discussed  in  the  next  section. 

Section  II.  A  Review  and  Criticism  of  Judicial 
Opinion  upon  the  Morals  of  Monopoly  and  Competition}'^^ 

The  problem  set  by  the  last  chapter  caimot  be  solved 
without  an  appreciation  of  the  changing  character  of 
morals,  how  they  originate  and  change  with  reference 
to  the  environment  or  situation  in  which  they  func- 
tion, and  what  the  moral  and  logical  grounds  are  justify- 
ing such  changes.  These  matters  will  be  fully  dis- 
cussed in  connection  with  the  analysis  of  our  problem. 

Underlying  the  changing  character  of  morals  is  the 
conception  that  new  conditions  require  new  rules.  It 
usually  happens  that  when  the  conditions  suddenly 
change  old  rules  are  applied  unaltered,  and  are  allowed 
to  work  serious  havoc  before  their  inertia  is  overcome 
and  an  effort  made  to  formulate  rules  fitting  the  new 
situation.  This  state  of  affairs  applies  in  particular  to 
the  morals  of  competition  and  monopoly.  Within  the 
last  half  century  there  has  been  an  unrivaled  develop- 
ment of  industry  from  a  simple  agricultural  stage  to  the 
extreme  form  of  the  factor^'  system,  or  from  industry 
as  carried  on  by  individuals  each  according  to  his 

=***  Reprinted  from  the  author's  paper,  "Morals  of  Monopoly 
and  Competition,"  Int.  J.  of  Ethics,  Jan.  1915. 


CHAPTER  THREE  93 

preference  to  a  condition  of  industry  carried  on  by  the 
coml)ined  efforts  of  many  men  resulting  in  large  com- 
binations and  monopolies.  But  there  has  been  no 
corresponding  change  in  business  methods  or  morals. 
On  the  contrary,  competitive  morals  have  been  applied 
without  alteration  to  conditions  of  monopoly  and  com- 
bination. This  mis-application  resulting  from  the 
unequal  evolution  between  business  morals  and  business 
conditions  appears  to  be  the  fundamental  cause  of  our 
present  monopolies  and  other  industrial  problems  en- 
gaging the  serious  efforts  of  our  legislatures  and  courts. 
I  hope  to  make  this  clear  in  the  body  of  this  section. 
The  opinion  is  often  expressed  that  the  so-called  laws 
of  competition  have  existed  since  time  out  of  mind,  are 
a  part  of  the  order  of  nature,  and  as  such  are  unchange- 
able. There  are  a  few  old  cases,  however,  which  show 
that  such  a  view  is  contrary  to  fact,  that  the  competitive 
system  grew  out  of  previous  monopolistic  conditions 
fostered  by  the  medieval  guild  system  and  by  royal 
grants.  It  was  welcomed  because  it  was  thought  a  vast 
improvement  upon  the  old  system  and  in  the  interest 
of  the  public.  Beale  and  Wyman,  writing  of  the  govern- 
mental regulation  of  business  during  the  late  middle 
ages  say:  "Not  only  did  the  law  regulate  business 
indirectly  through  the  courts,  parliament  itself  fre- 
quently regulated  prices  of  the  necessaries  of  life  by 
direct  legislation.  The  great  staples  like  wool  and 
food  were  habitually  regulated  in  this  way,  and  the 
employment  and  the  price  of  labor  was  a  subject  of 
statutory  provision.  Thus,  in  1366,  Henry  III,  after 
reciting  former  statutes  to  the  same  effect,  regulated 
the  price  of  bread  and  ale  according  to  the  price  of 


94  MONOPOLY  AND  COMPETITION 

wheat  and  barley,  and  forbade  forestalling,  that  is,  cover 
ing  the  market.  In  1344  the  ordinances  fixing  the 
export  prices  of  wool  were  repealed  after  some  years  of 
trial.  In  1349  all  laborers  obliged  to  serve  for  the 
customary  wages  and  'butchers,  fishmongers,  regrators, 
hostelors  (i.  e.,  innkeepers),  brewers,  bakers,  poul- 
terers, and  all  other  sellers  of  all  manner  of  victuals' 
were  bound  to  sell  for  a  reasonable  price.^^  These 
statutes  continued  in  force  throughout  the  middle  ages, 
and  until  the  settlement  of  America."  The  explana- 
tion of  this  regime  is  to  be  found  in  the  economic  con- 
ditions of  the  times. — The  respective  business  men  had 
a  practical  monopoly  in  their  ovm  localities.  To  pre- 
vent extortion  or  refusal  of  service,  either  of  which 
might  be  very  damaging  to  a  customer,  the  state  had 
to  undertake  legislation.  So  far  as  a  single  case  is 
evidence,  a  breaking  away  from  these  conditions  began 
with  the  Schoolmaster's  case  in  1410.^  The  masters 
of  a  grammar  school  in  Gloucester  brought  a  complaint 
against  another  master,  and  said  that  the  defendant 
had  started  a  school  in  the  same  town,  so  that  whereas 
formerly  they  had  received  40  d.  a  quarter  from  each 
child,  they  now  got  only  12  d.  to  their  damages.  Their 
counsel  contended  that  this  interference  and  damage 
made  a  g:od  action,  and  cited  many  instances  of  exclu- 
sive rights,  especially  the  claim  of  the  masters  of  Paul's 
that  there  should  be  no  other  masters  in  all  London 
except  themselves.  But  Justice  Hill  denied  the  claim 
of  the  plaintiffs  s'nce  they  had  no  estate  but  a  min- 

"  Rail  oad  rates  regulation,  p.  7. 
2^Y.  B.  IIHenrylV,  47,  21. 


CHAPTER  THKEE  95 

istry  for  the  time;  and  though  another  equally  compe- 
tent with  the  plaintiffs  came  to  teach  the  children, 
"this  was  a  virtuous  and  charitable  thing,  and  an  ease 
to  the  people,  for  which  he  could  not  be  punished  by 
the  law." 

It  would  be  difficult  to  find  a  better  illustration  of 
the  fact  that  competition  was  welcomed  because  it  was 
"an  ease  to  the  people."  But,  without  going  into  fur- 
ther detail  upon  the  origin  of  the  system  of  free  compe- 
tition, it  may  be  said  that  in  course  of  time  there 
developed  a  fixed  set  of  morals,  customs,  and  habits 
which  became  cr\'Stallized  into  the  common  law  and 
which  represent  what  seems  almost  the  apex  of  indi- 
vidual liberty.  To  give  an  idea  of  the  wide  range  of 
liberties  allowed  in  competition  by  the  American  com- 
mon law,  we  may  refer  to  the  recent  case  of  Citizens' 
Light,  Heat,  and  Power  Co.  v.  Montgomery  Light  and 
Power  Co.  The  contestants  were  competitors  in  fur- 
nishing light,  heat,  and  power  to  the  people  of  Mont- 
gomery. The  defendants  induced  customers  of  plain- 
tiff to  break  their  contracts  with  it,  made  false  state- 
ments about  its  credit  and  service,  and  frequently  took 
business  below  cost  in  order  to  take  its  trade  away. 
The  court  gave  judgment  for  the  plaintiff  on  the  first 
count,  but  for  the  defendants  on  the  other  two.  Judge 
Jones  saying:  "At  common  law,  a  trader,  or  persons  in 
other  callings,  in  order  to  get  another  man's  customers, 
could  use  any  means  not  involving  violation  of  the 
criminal  laws,  or  amounting  to  'fraud,'  'duress,'  or 
'intimidation,'  as  the  law  understands  and  applies  these 
terms  to  transactions  between  man  and  man,  or  to  his 


96  MONOPOLY  AND  COMPETITION 

becoming  a  wrongful  party  to  a  breach  of  another  man's 
contract.  The  trader  may  boast  untruthfully  of  the 
merits  of  his  wares,  so  long  as  it  does  not  take  the  form 
of  false  statements,  amounting  to  slander  or  wilful  mis- 
representation of  the  quality  of  a  rival's  products,  or  a 
libel  upon  the  character,  business  standing,  and  credit 
of  his  rival,  or  an  effort  to  induce  the  public  to  believe 
that  the  product  he  sells  is  that  manufactured  and 
sold  by  the  rival.  He  may  send  out  circulars,  or  give 
information  verbally,  to  customers  of  other  men,  know- 
ing there  are  bound  by  a  contract  for  a  definite  term, 
although  acting  with  the  purpose  of  getting  the  trade 
of  such  a  customer.  He  may  use  any  mode  of  per- 
suasion with  such  a  customer,  keeping  within  the  limi- 
tations stated,  which  appeal  to  his  self-interest,  reason 
or  even  his  prejudices.  He  may  descant  upon  the 
extent  of  his  rival's  facilities  compared  with  his  own,  his 
rival's  means,  his  insolvency,  if  it  be  a  fact,  and  the 
benefits  which  will  result  to  the  customer  in  the  future 
from  coming  to  the  solicitor  rather  than  remaining 
where  he  is.  He  may  lawfully,  at  least  so  far  as  his 
rival  is  concerned,  cut  prices  to  any  extent,  to  secure 
his  trade.  So  long  as  what  he  does  is  done  to  the  bene- 
fit of  his  own  trade  and,  in  taking  over  the  customers 
of  another,  he  keeps  within  the  limits  heretofore  defined, 
he  is  safe  from  legal  restraint  at  the  instance  of  a  comp- 
etitor in  following  'the  law  of  competition';  which 
takes  little  note  of  the  ordinary  rules  of  good  neighbor- 
hood, or  abstract  morality.  The  person  whose  cus- 
tomers are  thus  taken  from  him  cannot  complain,  for 
no  right  of  action  lies  in  his  favor  against  him  who 


CHAPTER  THREE  97 

solicited  his  customer,  since  the  soHcitor  exercised  a 
legal  right  in  a  legal  way.^* ' 

The  judge  giving  this  opinion  has  lost  sight  of  the 
pubhc  interest  in  the  competitive  system  which  was 
originally  designed  for  its  benefit.  He  takes  no 
account  of  common  morality.  He  simply  states  what 
the  common  law  allows  and  gives  his  decision  accord- 
ingly, which  is  clearly  a  definite  crystallization  of  the 
laissez  faire  policy  in  business.  The  liberties  which  he 
allows  function  well  in  such  a  competitive  system  in 
which  they  developed.  The  traders  were  small,  had 
approximately  equal  resources,  and  each  one  was  more 
or  less  for  himself.  If  one  trader  cut  prices,  or  gave 
rebates,  or  granted  special  favors  to  particular  cus- 
tomers, or  slandered  his  rival,  or  boasted  untruthfully 
on  the  merit  of  his  wares,  his  competitors  could  do 
likewise  with  equal  effect.  If  a  customer  could  not  get 
satisfactory  terms  from  one  trader,  he  could  do  so 
from  another.  The  public  took  no  interest  in  a  war 
of  competition  except  to  get  the  advantage  of  good 
bargains.  If  anyone  was  injured,  it  was  the  trader 
rather  than  the  consumer.  There  were,  of  course,  evils 
such  as  numerous  bankruptcies  and  periods  of  under- 
and  over-production,  but,  on  the  whole,  the  system 
was  worth  more  to  the  public  than  it  cost,  and  one 
positive  merit  that  it  did  have  was  that  it  allowed  full 
freedom  to  individual  capacity  and  ingenuity. 

But,  if  we  introduce  into  this  competitive  system  of 
approximately  equal  individual  traders,  a  large  com- 
bination of  traders  having  an  enormous  capital,  then 
"'171  Fed.  553. 


98  MONOPOLY  AND  COMPETITION 

the  competitive  morals  as  practiced  between  the  com- 
bination and  individual  trader  have  an  altogether  dif- 
ferent effect  because  of  the  inequalities  in  capital.  In 
a  siege  of  price-cutting,  in  getting  information  of  the 
competitors'  business  from  their  employees  and  from 
those  of  the  railroads,  in  securing  favorable  advertising 
in  the  form  of  disinterested  news  and  editorials,  in 
securing  favorable  legislation  and  able  lawyers  and 
solicitors,  and  in  delaying  litigation  by  appeals,  and  in 
many  other  instances  the  combination  can  get  advan- 
tages which  are  wholly  denied  to  the  small  trader 
because  of  his  small  capital.  The  small  trader  may  be 
a  better  manager  than  anyone  in  the  combination,  he 
may  produce  cheaper,  treat  his  customers  more  con- 
siderately, give  prompter  service,  and  offer  a  superior 
quality  of  goods,  but,  no  matter  what  his  merits  are, 
he  cannot  possibly  overcome  the  superior  capital  of  the 
combination  which,  as  a  consequence,  secures  a  monop- 
oly. It,  then,  has  power  to  oppose  the  public  with 
unreasonable  prices  through  which  it  may  recoup  the 
losses  from  the  war  of  competition.  When  such  a 
result  occurs,  we  begin  to  hear  of  "unfair  competition," 
"cut-throat  and  predatory  competition,"  "tainted 
money,"  "anti-trust  legislation,"  "the  extortion  of 
monopohes,"  "restraint  of  trade,"  "reasonable  and  un- 
reasonable restraint  of  trade,"  and  such  phrases  which 
indicate  that  a  problem  has  arisen  in  the  public  con- 
sciousness and  that  moral  feelings  have  been  aroused. 
The  old  adage  "competition  is  the  life  of  trade"  begins 
to  have  an  unsavory  sound  and  these  so-called  laws  of 
competition  which  existed  since  time  out  of  mind  begin 


CHAPTER  THREE  99 

to  be  questioned.  The  combination  is  dubbed  an 
"Octopus."  But,  as  a  matter  of  fact,  the  combina- 
tion has  done  nothing  more  than  carry  out  the  "good 
old-fashioned  laws  of  competition,"  the  very  same 
methods  practiced  daily  by  those  who  raise  the  bitter 
cry  against  it.  The  only  difference  is  that  the  com- 
bination got  all  the  gain  and  the  little  trader  went  to 
the  wall.  The  question  arises,  however,  whether  a 
combination  can  rightfully  adopt  the  same  methods 
practiced  by  small  traders  in  competition  and  whether 
its  large  capital  does  not  create  a  new  situation  in  which 
the  old  morals  of  competition  fail  to  function  and 
whether  the  combination  should  not  adopt  a  new  set 
of  morals  commensurate  with  its  new  situation.  Here 
there  is  clearly  a  moral  problem  and,  to  show  the  form 
which  it  has  taken,  we  can  do  no  better  than  to  refer 
to  some  court  decisions  on  the  matter.  We  may  guess 
that  the  conservatives  on  competition  will  think  the 
old  system  of  competition  good  enough,  while  those 
enlightened  on  new  conditions  will  recommend  a  change. 
I  shall  first  quote  some  opinions  from  the  former  class. 
We  shall  find  that  they  are  averse  to  make  distinctions 
between  kinds  of  competition  and  believe  compe- 
tition, as  such,  a  part  of  the  unchangeable  order  of 
nature.  The  Mogul  Steamship  case,  the  leading  case 
on  competition  in  England,  gives  the  general  trend  of 
the  conservatives'  views.  In  this  case,  the  defendants, 
who  were  firms  of  shipowners  trading  between  China 
and  Europe,  formed  themselves  into  an  association, 
from  which  the  plaintiffs  were  excluded,  the  purpose 
being  to  obtain  a  monopoly  of  the  tea  trade  and  main- 


100  MONOPOLY  AND  COMPETITION 

tain  freight  rates.  They  offered  a  rebate  of  five  per 
cent  to  shippers  who  consigned  their  tea  exchisively 
to  their  (the  defendants')  vessels,  and  also  to  send 
special  ships  to  under-bid  any  vessels  wliich  the  plain- 
tiffs might  send.  Defendants  reduced  rates  so  low  that 
plaintiffs  were  obliged  to  carr}'  at  a  loss  in  order  to 
obtain  homeward  cargoes.  To  recover  their  losses, 
they  brought  suit  for  damages.  Lord  Morris,  in  his 
judgment,  said:  " I  am  not  aware  of  any  stage  of  compe- 
tition called  'fair'  intermediate  between  lawful  and 
unlawful."  The  Lord  Chief  Justice  Coleridge  said: 
"  It  must  be  remembered  that  all  trade  is  and  must  be 
in  a  sense  selfish;  trade,  not  being  infinite,  nay,  trade  of 
a  particular  place  or  district  being  possibly  very  limited, 
what  one  man  gains  another  loses.  In  the  hand-to- 
hand  war  of  commerce  .  .  .  men  fight  on  without 
much  thought  of  others,  except  a  desire  to  excel  or 
defeat  them.  Very  lofty  minds,  like  Sir  Philip  Sid- 
ney with  his  cup  of  water,  will  not  stoop  to  take  an 
advantage,  if  they  think  another  wants  it  more.  Our 
age,  in  spite  of  high  authority  to  the  contrary,  is  not 
without  its  Sir  Philip  Sidneys;  but  these  are  counsels  of 
perfection  which  it  would  be  silly  indeed  to  make  the 
measure  of  the  rough  business  of  the  world  as  pursued 
by  ordinary  men  of  business."^  Lord  Justice  Fry  said: 
"I  know  no  limits  to  the  right  of  competition  in  the 
defendants — I  mean,  no  limits  in  law.  I  am  not 
speaking  of  morals  and  good  manners.  To  draw  the 
line  between  fair  and  unfair  competition,  between  what 
is  reasonable  and  unreasonable,  passes  the  power  of  the 
^  21  L.  R.  Q.  B.  D.,  553-4. 


CHAPTER  THREE  101 

courts.  Competition  exists  when  two  or  more  persons 
seek  to  possess  or  enjoy  the  same  thing:  it  follows  that 
the  success  of  one  must  be  the  failure  of  another — 
and  no  principle  of  law  enables  us  to  interfere  with  or 
to  moderate  that  success  or  that  failure  so  long  as  it  is 
due  to  mere  competition."^^ 

Lord  Justice  Bowen  gave  the  clearest  exposition  of 
the  common  law  on  this  subject.  He  said  in  part: 
"  We  are  presented  in  this  case  with  an  apparent  con- 
flict or  antimony  between  two  rights  that  are  equally 
regarded  by  the  law — the  right  of  the  plaintiffs  to  be 
protected  in  the  legitimate  exercise  of  their  trade,  and 
the  right  of  the  defendants  to  carry  on  their  business 
as  seems  best  to  them,  provided  they  commit  no 
wrong  to  others.  .  .  .  What,  then,  are  the  limitations 
which  the  law  imposes  upon  a  trader  in  the  conduct  of 
his  business  as  between  himself  and  other  traders?  .  .  . 
No  man,  whether  trader  or  not,  can  .  .  .  justify  dam- 
aging another  in  his  commercial  business  by  fraud  or 
misrepresentation.  Intimidation,  obstruction,  and  mo- 
lestation are  forbidden;  so  is  the  intentional  procure- 
ment of  a  violation  of  individual  rights,  contractual  or 
other,  assuming  always  that  there  is  no  just  cause  for  it. 
The  intentional  driving  away  of  customers  by  shew  of 
violence;-"  the  obstruction  of  actors  on  the  stage  by 
preconcerted  hissing  ;2^  the  disturbance  of  wild  fowl  in 

«  23  L.  R.  Q.  B.  D^  625-26. 
"  Tarldon  v.  M'Gawlcy,  Peak  N.  P.  C,  270. 
-^CliJJord  V.  Brandon,  2  Comp.  358;  Gregory  v.  Brunsuick, 
6  Man  &  G.,  205. 


102  MONOPOLY  AND  COMPETITION 

decoys  by  firing  guns;^^  the  impeding  or  threatening 
servants  or  workmen;^''  the  inducing  persons  under  per- 
sonal contracts  to  break  contracts  ;^^  all  are  instances  of 
such  forbidden  acts.  But  the  defendants  have  been 
guilty  of  none  of  these  acts.  They  have  done  nothing 
more  against  plaintiffs  that  pursue  to  the  bitter  end  a 
war  of  competition  waged  in  the  interest  of  their  own 
trade.  ...  To  say  that  a  m.an  is  to  trade  freely  but 
that  he  is  to  stop  short  at  any  act  which  is  calculated  to 
harm  other  tradesmen,  and  which  is  designed  to  attract 
business  to  his  own  shop,  would  be  a  strange  and 
impossible  counsel  of  perfection.  But  we  are  told  that 
competition  ceases  to  be  a  lawful  exercise  of  trade 
...  if  carried  to  a  length  which  is  not  fair  or  reason- 
able. The  offering  of  reduced  rates  is  said  to  have  been 
"unfair."  This  seems  to  assume  that,  apart  from 
fraud,  intimidation,  molestation,  or  obstruction  of  some 
other  personal  right,  there  is  some  natural  standard  of 
"fairness"  or  "reasonableness"  (to  be  determined  by 
the  internal  consciousness  of  judges  and  juries)  beyond 
which  competition  ought  not  in  law  to  go.  There  seems 
to  be  no  authority  ...  for  such  a  proposition.  It 
would  impose  a  fetter  upon  trade.  .  .  .  And  what  is 
to  be  the  definition  of  a  "fair  profit?"  It  is  said  it 
ought  to  be  a  normal  rate  of  freight,  such  as  is  reason- 
ably remunerative  to  the  shipowTier.  But  over  what 
period  of  time  is  the  average  of  this  reasonable  remu- 

^  Carringlon  v.  Taylor,  11  East  571;  Keehle  v.  Hickering,  11 
E?st,  574. 

'"  Garret  v.  Taylor,  Cro.  Jac.  567. 

"  Bowen  v.  Hall,  6  Q.  B.  D.,  333;  Lumley  v.  Gye,  2  E.  &  B.  216. 


CHAPTER  THREE  103 

nerativeness  to  be  calculated?  All  commercial  men  are 
acquainted  with  the  ordinary  expedient  of  sowing  one 
year  a  crop  of  apparently  unfruitful  prices,  in  order  by 
driving  competition  away  to  reap  a  fuller  harvest  of 
profit  in  the  future;  and  until  the  argument  at  bar,  it 
might  be  doubted  whether  shipowners  or  merchants 
were  ever  deemed  to  be  bound  by  law  to  conform  to 
some  imaginary  "normal"  standard  of  freights  or  prices, 
or  that  Law  Courts  had  a  right  to  say  to  them  in  respect 
of  their  competitive  tariffs,  "Thus  far  shalt  thou  go 
and  no  further."  To  attempt  to  limit  English  compe- 
tition in  this  way  would  probably  be  as  hopeless  an 
endeavor  as  the  experiment  of  King  Canute.  .  .  .  As- 
sume that  what  is  done  is  intentional,  and  that  it  is 
calculated  to  do  harm  to  others.  Then  comes  the 
question,  Was  it  done  with  or  without  just  "cause  or 
excuse"?  .  .  .  legal  justification  would  not  exist  when 
the  act  was  merely  done  with  the  intention  of  causing 
temporal  harm,  without  reference  to  one's  own  lawful 
gain,  or  the  lawful  enjoyment  of  one's  own  rights.  .  .  . 
But  if  the  real  object  were  to  enjoy  what  was  one's  own, 
or  to  acquire  for  oneself  some  advantage  in  one's  pro- 
perty or  trade,  and  what  was  done  was  done  honestly, 
peacably,  and  without  any  of  the  illegal  acts  above 
referred  to,  it  could  not  in  my  opinion,  properly  be 
said  to  be  done  w'thout  just  cause  or  excuse."^^ 

Along  the  same  line  as  this  opinion  have  been  numer- 
ous American  decisions.  The  following  cases  indi- 
cate the  lower  limits  to  which  competition  may  go  in 
America. 

3=  23  L.  R.  Q.  B.  D.,  614-16.  618-19. 


104  MONOPOLY  AND  COMPETITION 

In  Bohn  Mfg.  Co.  v.  Xortlnvestern  Lumbermans^  Asso- 
ciation, a  number  of  retail  dealers  in  lumber  combined 
for  the  purpose  of  preventing  wholesale  dealers  in  lum- 
ber from  selling  directly  to  the  consumers  or  other  non- 
dealers  in  localities  where  a  member  of  the  association 
did  retail  business.  Judge  Mitchell  upheld  the  asso- 
ciation, saying:  "  What  one  man  may  la\^^ully  do  singly, 
two  or  more  may  lawfully  do  jointly.  The  number  who 
unite  to  do  the  act  cannot  change  its  character  from 
lawful  to  unlawful.  The  gist  of  a  private  action  for 
the  wrongful  act  is  not  the  combination  or  conspiracy, 
but  the  damage  done  or  threatened  to  the  plaintiff  by 
the  acts  of  the  defendants.  ...  It  can  never  be  a 
crime  to  combine  to  commit  a  lawful  act,  but  it  may  be 
a  crime  for  several  to  conspire  to  commit  an  unlawful 
act,  which,  if  done,  by  one  individual  alone,  although 
unlawful,  would  not  be  criminal." 

In  Macauley  Brothers  v.  Tierney,  the  members  of  a 
national  association  of  plumbers  agreed  not  to  buy  from 
wholesale  dealers  who  sold  to  plumbers  not  members. 
Chief  Justice  Matteson  justified  the  action,  saying: 
"  Competition,  it  has  been  said,  is  the  life  of  trade.  .  .  . 
To  hold  such  an  act  wrongful  and  illegal  would  be  to 
stifle  competition."^'  .   .   . 

In  National  Protective  Association  v.  Cumming,  where 
contestants  were  competing  organizations  of  steam- 
fitters,  defendants  caused  the  discharge  of  plaintiffs  by 
the  threat  of  a  strike.  Chief  Justice  Parker  justified  the 
conduct  of  defendants  mainly  on  the  grounds  of  compe- 
tition, that  an  organization  may  lawfully  do  what  an 
33 19  R.  I.,  225. 


CIL\PTER  THREE  105 

individual  may  lawfully  do.  The  following  extract  in- 
dicates the  ground  of  his  decision:  "A  man  has  a  right, 
under  the  law,  to  start  a  store  and  to  sell  at  such 
reduced  prices  that  he  is  able  in  a  short  time  to  drive 
the  other  storekeepers  in  his  vicinity  out  of  business, 
when,  having  possession  of  the  trade,  he  finds  himself 
soon  able  to  recover  the  loss  sustained  while  ruining  the 
others.  Such  has  been  the  law  for  centuries.  The 
reason,  of  course,  is  that  the  doctrine  has  generally  been 
accepted  that  free  competition  is  worth  more  to  society 
than  it  costs,  and  that  on  this  ground  the  infliction  of 
damages  is  privileged. "^^ 

An  unusually  vigorous  defense  of  competition  is  found 
in  a  Standard  Oil  case  decided  in  West  Virginia.  De- 
fendant, the  Standard  Oil  Company,  built  a  pipe  line 
through  the  territory  of  the  plaintiffs'  line,  and  then 
refused  to  buy  oil  from  producers  unless  they  shipped 
it  through  their  own  line,  and  also  refused  to  buy  any 
oil  shipped  through  plaintiffs'  line.  This  ruined  the 
business  of  the  plaintiff.  Judge  Brannon  held  such  con- 
duct not  actionable.  He  said:  "This  is  the  act  of 
persons  and  corporations,  by  union  of  means  and  effort, 
drawing  to  themselves,  in  the  field  of  competition,  the 
lion's  share  of  the  trade.  This  is  not  a  monopoly  con- 
demned by  law.  The  lion  has  stretched  out  his  paws 
and  grabbed  in  prey  more  than  others,  but  that  is  the 
natural  right  of  the  lion  in  the  field  of  pursuit  and  cap- 
ture. Pity  that  the  lion  exists,  his  competing  animals 
may  say;  but  natural  law  accords  the  right,  it  is  given 
him  by  the  maker  for  existence.  The  state  made  the 
"  170  N.  Y.,  315. 


106  MONOPOLY  AND  COMPETITION 

Standard  Oil  Company,  and  gave  it  the  right  of  being 
and  working.  .  .  .  The  defendant  companies  were  all 
in  common  interest.  Could  they  not  unite  to  further 
their  interests?  Could  not  the  Standard  Oil  Company 
buy  from  whom  it  chose?  .  .  .  Cannot  the  village  mer- 
chant say  to  the  farmer,  "  I  will  not  buy  your  eggs  unless 
you  buy  my  cahco?"  Cannot  the  big  mill  owner  refuse 
to  buy  wheat  from  those  who  do  not  ship  it  over  a  rail- 
road or  steamboat  owned  by  him?  .  .  .  Now,  these 
companies  were  furthering  their  interests  in  lawful  com- 
petition with  others.  .  .  .  That,  in  these  days  of  sharp 
ruinous  competition,  some  perish  is  inevitable.  The 
dead  are  found  strewn  all  along  the  highways  of  busi- 
ness and  commerce.  Has  it  not  always  been  so?  The 
evolution  of  the  future  must  answer.  What  its  evolu- 
tion will  be  in  this  regard  we  do  not  yet  know,  but  we 
do  know  that  thus  far  the  law  of  the  survival  of  the 
fittest  has  been  inexorable.  Human  intellect — human 
laws — cannot  prevent  these  disasters.  The  dead  and 
wounded  have  no  right  of  action  from  this  imperious 
law.  This  is  a  free  country.  Liberty  must  exist.  It 
is  for  all.  This  is  a  land  of  equality,  so  far  as  the  law 
goes,  though  some  men  do  in  lust  of  gain  get  advantage. 
Who  can  help  it?"^^ 

From  these  cases,  it  is  possible  to  form  an  idea,  not 
only  of  the  particular  acts  allowable  in  competition,  but 
also  of  the  general  principles  on  which  they  are  per- 
mitted. The  former  have  been  sufficiently  reviewed. 
The  latter  seem  to  fall  into  three  classes:  competition 
is  morally  right  because:  (1)  it  is  the  right  of  individual 
«50W.  Va.,  611. 


CHAPTER  THREE  107 

freedom,  and  what  individuals  may  do  singly  they  may 
also  do  jointly;  (2)  it  is  based  upon  natural  right  and 
the  law  of  the  survival  of  the  fittest,  an  order  of  nature 
created  by  the  maker;  (3)  it  is  for  the  best  interests  of 
society,  being  worth  more  than  it  costs.  These  prin- 
ciples are  but  reflections  of  a  competitive,  industrial 
society  which  has  been  defended  ever  since  Adam 
Smith's  "Wealth  of  Nations:'  But  within  the  last  fifty 
years,  there  has  been  a  rapid  change  in  the  industrial 
order;  a  change  from  individual,  competitive,  and 
small-scale  production  to  cooperative,  monopolistic, 
and  large-scale  production;  a  movement  from  an  un- 
directed, unorganized,  and  separate  control  of  the  many 
to  the  directed,  organized,  and  unified  control  of  the 
few. 

The  judiciary  has  begun  to  appreciate  the  signific- 
ance and  tendency  of  this  movement.  Accordingly, 
we  have  a  number  of  cases  in  which  the  judges  have 
ceased  justifying  acts  of  trade  simply  because  they  are 
due  to  mere  competition,  but  have  carefully  considered 
whether  a  given  act  is  for  the  best  interests  of  society, 
whether  it  tends  toward  monopoly,  or  is  only  in  reaso- 
nable restraint  of  trade. 

Without  going  into  details,  it  may  be  said  in  a  general 
way  that  the  principles  upon  which  this  new  line  of 
decisions  is  based  began  to  be  laid  down  in  the  English 
case  of  Mitchel  v.  Reynolds  in  1712.  The  defendant 
leased  his  bake-shop  in  the  parish  of  St.  Andrew's 
Holborn,  to  plaintiff  for  a  period  of  five  years,  and  upon 
a  bond  of  fifty  pounds,  agreed  not  to  open  a  new  shop 
within  this  time.  But  he  broke  his  agreement  and  was 


108  MONOPOLY  AND  COMPETITION 

sued.  Parker,  C.  J.,  decided  in  favor  of  the  plaintiff 
because  the  contract  was  Hmited  to  a  particular  place 
and  offered  a  sufficient  consideration  to  the  defendant. 
But  a  contract  restraining  trade  generally  throughout 
the  kingdom  "must  be  void,  being  of  no  benefit  to 
either  party  and  only  oppressive";  and  "the  true  rea- 
sons" for  judging  voluntary  restraints  of  trade  are: 
"first,  the  mischiefs  which  may  arise  under  them,  first 
to  the  party,  by  loss  of  his  livelihood,  and  the  subsis- 
tence of  his  family;  secondly,  to  the  public,  by  depriving 
it  of  a  useful  member."  ^^^ 

The  principles  for  judging  a  contract  in  restraint  of 
trade  are  more  clearly  stated  in  Horner  v.  Graves,  1831. 
The  contestants  were  dentists.     Defendant,  who  was  a 
moderately  skillful  dentist,  agreed  not  to  practice  inde- 
pendently within  a  radius  of  100  miles  from  York,  in 
consideration  of  entering  the  service  of  plaintiff  for 
five  years  at  a  salary  of  100  pounds  per  year,  to  be 
increased  annually ;  but  within  three  months  he  started 
independently  within  the  prohibited  distance.     Counsel 
for  defendant  argued:  "If  the  Plaintiff  were  to  labor 
night  as  well  as  day,  it  would  be  physically  impossible 
for  him  to  draw  all  the  teeth  of  such  a  district.     If  he 
leaves  home,  York  is  without  the  benefit  of  his  skill; 
if  he  remains  at  York,  patients  may  die  at  Lancaster 
.   .  .  the  health  of  the  public  is  endangered,  without 
the  possibility  o!:  any  advantage  to  the  Plaintiff.     The 
agreement  is  therefore  unreasonable  and  void." 

Tyndall,  C.  J.,  agreed  with  counsel,  and  out  of  these 
petty  facts,  developed  a  most  significant  principle  for 

^'^^  1  p.  wms.  181. 


CHAPTER  THREE  109 

distinguishing  between  reasonable  and  unreasonable 
restraint  of  trade,  and  one  which  has  been  frequently 
afhrmed  in  American  decisions  upon  questions  of 
monopoly.  He  said:  "And  we  do  not  see  how  a  better 
test  can  be  applied  to  the  question  whether  reasonable 
or  not,  than  by  considering  whether  the  restraint  is 
such  only  as  to  afford  a  fair  protection  of  the  interests 
of  the  party  in  favor  of  whom  it  is  given,  and  not  so 
large  as  to  interfere  with  the  interests  of  the  public. 
Whatever  restraint  is  larger  than  necessary  for  the 
protection  of  the  party,  can  be  of  no  benefit  to  either. 
It  can  only  be  oppressive;  and  if  not  oppressive,  it  is, 
in  the  eye  of  the  law,  unreasonable.  Whatever  is  in- 
jurious to  the  interests  of  the  public  is  void,  on  the 
grounds  of  public  policy."^" 

In  these  two  cases  we  have  laid  down  the  fundamental 
principles  for  the  regulation  of  monopolies  and  restraint 
of  trade,  a  half  century  before  the  problem  existed  in 
its  modern  form.  The  public  interest  should  be  the  con- 
trolling factor  in  determining  the  reasonableness  of  a 
contract  in  restraint  of  trade.  Monopoly  or  total  re- 
straint of  trade  is  against  the  public  interest  and  is 
unlawful.  But  a  partial  restraint  of  trade,  if  it  allows 
a  fair  consideration  for  the  contracting  parties  and  no 
more  than  is  necessary  for  their  protection,  is  reason- 
able and  good.  If  it  produces  a  greater  protection  than 
necessary,  it  is  oppressive  and  void.  It  remains  only 
to  define  more  specifically  what  constitutes  monopoly 
and  public  interest,  and  by  what  principle  we  may 

M  7  Bing..  733.  743. 


1 10  MONOPOLY  AND  COMPETITION 

determine  what  a  fair  protection  is  for  the  contracting 
parties. 

The  definition  of  monopoly  and  of  public  interest  is 
rather  concretely  stated  in  Morris  Run  Coal  Company 
V.  Barclay  Coal  Company,  decided  by  the  Supreme  Court 
of  Pennsylvania  in  1871.  Five  coal  companies  organ- 
ized a  selling  agency  which  had  control  of  the  produc- 
tion of  the  respective  companies  and  could  fix  prices. 
Judge  Agnew  said:  "When  competition  is  left  free, 
individual  error  or  folly  will  generally  find  a  correction 
in  the  conduct  of  others.  But  here  .  .  .  they  have 
combined  together  to  govern  the  supply  and  the  price 
of  coal  in  all  the  markets  from  the  Hudson  to  the 
Mississippi  river.  .  .  .  The  public  interest  must  suc- 
cumb to  it  for  it  has  left  no  competition  to  correct  its 
baleful  influence.  .  .  .  The  domestic  hearth,  the  fur- 
naces of  the  iron  master,  the  fires  of  the  manufactures 
all  feel  its  restranit.  .  .  .  Such  a  combination  is  more 
than  a  contract,  —  it  is  an  offense.  .  .  .  Every  "cor- 
ner," in  the  language  of  the  day,  whether  it  be  to  affect 
the  price  of  articles  of  commerce  such  as  breadstuffs, 
or  the  price  of  vendible  stocks,  when  accompanied  by 
a  confederation  to  raise  or  depress  the  price  and  oper- 
ate on  the  market,  is  a  conspiracy." 

In  another  coal  case,  Pocahontas  Coke  Co.  v.  C.  fe'  C. 
Co.,  where  20  coal  operators  combined  in  a  similar  form 
as  in  the  case  above,  monopoly  is  still  more  clearly 
defined.  Judge  Cox  said:  "If  the  direct  and  necessary 
and  natural  effect  of  a  contract  or  combination  among 
producers  and  sellers  of  a  commodity  is  to  restrain  com- 
petition and  control  prices  to  the  injury  of  the  public 


CHAPTER  THREE  111 

when  all  the  powers  of  the  contract  or  combination 
shall  have  been  exercised,  the  contract  or  combination 
is  in  unreasonable  restraint  of  trade  and  against  public 
policy.  ...  A  contract  which  is  charged  to  be  in 
restraint  of  trade  is  not  to  be  tested  by  what  has  been 
done  under  it  but  what  may  be  done  under  it."^'' 

The  definition  of  monopoly  is  now  clear.  The  test 
of  a  monopoly  or  contract  in  restraint  of  trade  against 
the  public  interest  is  power  or  tendency  to  control 
prices. 

Another  basic  principle  of  numerous  recent  decisions 
against  monopolistic  practices  was  laid  down  in  Massa- 
chusetts by  Chief  Justice  Shaw  in  Commonwealth  v. 
Alger,  1851.  The  question  was  whether  an  owner  of 
land  along  the  seashore  might  extend  a  wharf  beyond  a 
limit  prescribed  by  the  legislature,  if  it  neither  ob- 
structs navagation  nor  is  a  public  nuisance.  Justice 
Shaw  did  not  permit  the  exception  since  this  would 
confuse  the  law,  and  the  law  he  upheld  on  this  ground: 
"We  think  it  a  settled  principle,  growing  out  of  the 
nature  of  well-ordered  civil  society,  that  every  holder 
of  property,  however  absolute  and  unqualified  may  be 
his  title,  holds  it  under  the  implied  liability  that  his 
use  of  it  may  be  so  regulated,  that  it  shall  not  be  injuri- 
ous to  the  equal  enjoyment  of  others  having  an  equal 
right  to  the  enjoyment  of  their  property,  nor  injurious 
to  the  rights  of  the  community.  All  property  in  this 
commonwealth  ...  is  derived  directly  or  indirectly 
from  the  government,  and  held  subject  to  the  common 
good  and  general  welfare.     Rights  of  property,  like 

"  60  W.  Va.,  508,  524-5. 


112  MONOPOLY  AND  COMPETITION 

other  social  and  conventional  rights,  are  subject  to 
such  reasonable  limitations  in  their  enjoyment  ...  as 
the  legislature,  under  the  governing  and  controlling 
power  vested  in  them  by  the  constitution,  may  think 
necessary  and  expedient.  .  .  .  The  power  we  allude 
to  is  .  .  .  the  police  power,  the  power  vested  in  the 
legislature  by  the  constitution,  to  make,  ordain,  and 
estabhsh  all  manner  of  wholesome  and  reasonable  laws 
statutes  and  ordinances,  either  with  penalties  or  with- 
out, not  repugnant  to  the  constitution,  as  they  shall 
judge  to  be  for  the  good  and  welfare  of  the  common- 
wealth, and  of  the  subjects  of  the  same." 

The  good  of  the  subject  of  the  state  or  the  public 
interest  also  formed  the  basis  of  a  dissenting  opinion 
of  Lord  Esher  in  the  Mogul  Steamship  case  already 
referred  to.  He  said:  "Unless  the  public  has  an  inter- 
est in  traders  being  left  to  their  own  judgment,  and 
to  a  free  course  of  trade,  there  is  no  foundation  for  the 
law  as  to  agreements  in  restraint  of  trade  being  illegal. 
It  follows,  if  the  agreement  be  an  agreement  to  violate 
the  right  of  an  independent  trader  by  restraining  his 
trade,  there  is  a  sufficient  public  interest  which  is  also 
injured,  and  the  agreement  is  an  indictable  conspiracy. 
...  If  one  goes  beyond  the  exercise  of  the  course  of 
trade  .  .  .  his  act  is  an  unlawful  obstruction.  .  .  . 
The  act  of  the  defendants  lowering  their  freights  far 
beyond  a  lowering  for  the  purpose  for  any  trade — that  is 
to  say,  so  low  that  if  they  continued  it,  they  themselves 
could  not  carry  on  the  trade — was  not  an  act  done  in 
the  exercise  of  their  own  free  right  of  trade,  but  was  an 
act  done  evidently  for  the  purpose  of  interfering  with — 


CHAPTER  THREE  113 

the  plaintiff's  right  to  a  free  course  of  trade,  and  was 
therefore  a  wrongful  act."^^ 

The  principle  that  property  rights  proceed  from  the 
state  and  must  be  used  for  the  common  good  of  its  sub- 
jects received  a  new  interpretation  in  a  recent  Massa- 
chusetts case,  Martell  v.  White,  having  special  bearing 
upon  competition.  The  question  was  whether  a  vol- 
untary association  of  granite-workers  could,  by  a  system 
of  fines,  prevent  members  from  trading  with  plaintiff, 
not  a  member  of  the  association,  and  so  ruin  his 
business  of  quarrying  granite.  The  court  denied  the 
right,  Judge  Hammond  saying:  "To  what  extent  com- 
bination may  be  allowed  in  competition  is  a  matter 
about  which  there  is  as  yet  much  conflict,  but  it  is 
possible  that,  in  a  more  advanced  stage  of  the  discussion, 
the  day  may  come  when  it  will  be  more  clearly  seen 
and  will  more  distinctly  appear  in  the  adjudication  of 
the  courts  than  as  yet  has  been  the  case;  that  the  pro- 
position that  what  one  man  lawfully  can  do,  what  any 
number  of  men  acting  together  by  combined  agreement 
may  do,  is  to  be  received  with  newly  disclosed  quali- 
fications arising  out  of  the  changed  conditions  of  civi- 
lized life  and  of  the  increased  facility  and  power  of 
organized  combination,  and  that  the  difference  between 
the  power  of  individuals,  acting  each  according  to  his 
preference,  and  that  of  an  organized  extensive  com- 
bination may  be  so  great  in  its  effect  upon  private  and 
pubUc  interests  as  to  cease  to  be  simply  one  of  degree 
and  to  reach  the  dignity  of  a  difference  in  kind.  .  .  . 
The  right  of  competition  rests  upon  the  doctrine  that 
>8  23  L.  R.  Q.  B.  D.,  606-10. 


1 14  MONOPOLY  AND  COMPETITION 

the  interests  of  the  great  public  are  best  subserved  by 
permitting  the  general  and  natural  laws  of  business  to 
have  their  full  and  free  operation,  and  that  this  end 
is  best  attained  when  the  trader  is  allowed  in  his  busi- 
ness to  make  free  use  of  these  laws.  .  .  .  But  from 
the  very  nature  of  the  case  it  is  manifest  that  the  right 
of  competition  furnishes  no  justification  for  an  act  done 
by  the  use  of  means  which  in  their  nature  are  in  vio- 
lation of  the  principle  upon  which  its  rests. "^^ 

Here,  then,  we  have  a  clear  grasp  of  the  modern 
situation  and  a  clear  recognition  that  changes  in  the 
conditions  of  civilized  life  call  for  equal  changes  in 
business  methods  and  principles  applicable  to  these 
changed  conditions,  that  although  it  may  be  logically 
inferred  that  what  one  man  may  do  singly  he  may  also 
do  jointly  with  others,  results  may  prove  this  an  invalid 
conclusion,  and  the  difference  in  conditions  may  be  so 
important  as  to  make  the  inference  impossible. 

Summing  up  the  new  line  of  cases  that  we  have 
re\'iewed  upon  the  Hmits  of  competition,  we  may  draw 
the  boundaries  as  follows:  The  legitimacy  of  a  given 
business  method,  or  use  of  property,  or  contract  in 
restraint  of  trade  is  to  be  determined  by  reference  to 
the  public  interest  or  good  of  society,  from  which  all 
rights  are  derived.  Monopoly  or  contracts  in  restraint 
of  trade  giving  the  parties  concerned  the  power  or 
possibility  of  controlling  prices  are  against  an  individual 
by  a  combination  which  aims  to  destroy  his  business 
by  a  mere  agreement  not  to  trade  with  him,  or  by 
going  beyond  the  ordinary  course  of  trade,  such  as 

39 185  Mass.,  255,  259-61. 


CHAPTER  THREE  115 

doing  business  at  a  loss — is  against  the  public  interest 
and  unlawful.  Under  the  police  power,  the 'legislature 
may  pass  any  laws  limiting  methods  of  business  and 
uses  of  property  to  any  extent  which  they  deem  neces- 
sary for  the  welfare  of  the  people. 

It  would  be  quite  impossible  to  enumerate  all  the 
particular  acts  declared  illegal  both  by  statutes  and 
courts  within  the  limits  thus  drawn.  But  the  mention- 
ing of  a  few  that  some  courts  have  prohibited  may  aid 
in  getting  a  clearer  idea  of  unfair  competition.  A 
manufacturer  or  seller  may  not  give  rebates  to  the  pur- 
chasers of  his  commodities  for  the  purpose  of  main- 
taining and  fixing  prices.^'^  He  may  not  sell  goods 
lower  at  one  place  than  at  another  for  the  purpose  of 
destroying  competition.  He  may  not  compel  dealers 
not  to  purchase  or  deal  in  the  goods  of  a  rival  so  as 
to  have  him  deal  in  his  own  exclusively.''^  He  may 
not  follow  the  employees  of  a  rival  and  harass  them 
while  engaged  in  the  discharge  of  their  duties.  He 
may  not  publish  false  and  injurious  reports  about  his 
rival."*-  He  may  not  fix  the  prices  and  conditions 
under  which  dealers  should  sell  his  goods.^  A  seller  as 
a  member  of  an  association  of  retail  dealers  may  not 
refuse  to  sell  goods  to  a  non-member,  or  charge  him 

"  Slate  V.  Standard  Oil  Company,  218  Mo.,  1,442. 

*'  People  V.  Duke,  44  N.  Y.  Supp.,  336;  Commonweallh  v. 
Strauss,  191  Mass.  545.  Cibley  v.  United  Shoe  Machinery  Co., 
152  Fed.,  720. 

«  StaMard  Oil  Co.  v.  Doyle,  118  Ky.  622. 

«Co«r/  Wall  Paper  Co.  c.  Voighl  &•  Sons,  212  U.  S.  227; 
Dr.  Miles  Med.  Co.  v.  Pork  &  Sons  Co.,  220  U.  S.  873. 


116  MONOPOLY  AND  COMPETITION 

higher  prices  than  a  member,'*^  nor  compel  wholesale 
dealers  not  to  sell  goods  to  nonmembers.^^  And,  as  a 
member  of  a  monopoly,  he  may  not  charge  more  than 
competitive  prices  for  his  goods  under  penalty  of 
treble  damages.'*'^ — All  such  acts  are  forbidden  as  tend- 
ing toward  and  establishing  a  monopoly.  But  any 
contract  in  restraint  of  trade,  or  method  of  business  is 
permitted  by  the  courts  when  it  is  not  a  part  of  a 
monopolistic  scheme  nor  is  likely  to  produce  such  a 
result. 

When  we  consider  that  hardly  a  one  of  these  acts 
would  be  denied  to  an  individual  acting  singly  for  his 
own  interests,  and  compare  them  with  acts  prohibited 
and  acts  allowed  by  the  common  law  as  expounded  by 
Lord  Justice  Bowen  or  Judge  Jones,  both  of  whom  we 
have  quoted,  it  becomes  apparent  what  a  remarkable 
change  has  taken  place  from  the  business  methods  of 
individual  competitive  bargaining  to  those  of  coopera- 
tive and  monopolistic  bargaining.  The  courts  appar- 
ently do  recognize  a  difference  in  kind  between  the  acts 
of  individuals  acting  alone  and  the  acts  of  individuals 
acting  as  a  combination.  The  query  now  arises  what 
are  the  conditions  which  account  for  this  difference, 
and  which  do  not  allow  individuals  to  do  jointly  what 
they  may  do  singly.  What  is  the  difference  between 
competition  as  carried  on  by  a  combination  and  as  car- 
ried on  by  an  individual? 

«  Montague  &=  Co.  v.  Lowry,  193  U.  S.  38. 

^'^  Cleland  v.  Anderson,  66  Neb.  252. 

^*  Chattanooga  Foundry  Co.  v.  Atlanta,  203  U.  S.  390. 


CHAPTER  THREE      .  117 

Lord  Justice  Bowen  said  the  Mogul  Steamship  case 
presented  "an  antinomy  between  two  rights  equally 
regarded  by  the  law — the  right  of  the  plaintiffs  to  be 
protected  in  the  Icigitmate  exercise  of  their  trade,  and 
the  right  of  the  defendants  to  carry  on  their  business  as 
seems  best  to  them,  provided  they  commit  no  wrong 
to  others."  Did  defendants  commit  any  wrong  to 
others?  The  judge  answers  the  question  by  taking  a 
backward  look.  He  finds  that  in  1620  it  was  forbidden 
to  drive  workmen  and  servants  away  from  a  rival  by 
threatening  to  cut  their  arms  off;  that  in  1706  it  was 
forbidden  to  fire  with  guns  into  a  man's  decoy  pond  for 
the  sake  of  frightening  away  his  fowl;  that  in  1804  it 
was  forbidden  to  drive  a  rival's  customers  away  by 
shooting  them  with  cannon;  that  in  1810  it  was  declared 
illegal  to  drive  actors  from  the  stage  by  preconcerted 
hissing;  and  that  in  1853  it  was  forbidden  for  a  third 
party  to  induce  the  breaking  of  personal  contracts. 
"But  the  defendants,"  he  says,  "have  been  guilty  of 
none  of  these  acts.  They  have  done  nothing  more 
against  the  plaintiffs  than  to  pursue  to  the  bitter  end 
the  war  of  competition  waged  in  the  interest  of  their 
own  trade."  If  they  had  no  such  interest  to  main- 
tain, and  if  they  had  injured  plaintiff  for  the  mere  sake 
of  the  injury,  it  would  have  been  unjust.  But,  since 
it  was  done  for  the  maintenance  of  their  own  interests, 
it  was  just  and  lawful.  Lord  Esher,  however,  looks 
at  the  question  from  an  opposite  point  of  view.  He 
takes  2i  forward  look  and  considers  whether  such  com- 
petition is  compatible  with  the  public  interest  and  wel- 
fare.    He  does  not  see  that  there  can  be  any  permanent 


118  MONOPOLY  AND  COMPETITION 

gain  to  the  public  in  destroying  a  useful  trader  by 
doing  business  at  a  loss,  as  the  defendants  did,  and 
therefore  gives  judgment  for  the  plaintiff. 

Thus  the  solution  of  the  antinomy  between  equal 
rights  turns  upon  the  point  of  view  of  the  judge. 
Does  the  act  come  within  the  scope  of  acts  classified 
as  wrong  in  the  past?  If  not,  it  is  right.  Or  does  it 
tend  to  further  or  hinder  the  public  good?  If  the 
former,  it  is  right;  if  the  latter,  it  is  wrong.  Which  of 
these  two  views  is  based  on  the  better  ethical  and 
logical  principle? 

The  first  essential  in  deciding  this  issue  is  a  keen 
consciousness  of  the  different  logics  used  in  these  two 
lines  of  cases.  It  is  significant  that  on  both  sides  there 
are  judges  who  say  that  the  standard  of  reference  is  the 
public  interest.  The  conservatives  argue  in  syllogistic 
fashion  as  follows:  Competition  is  the  life  of  trade  and 
in  the  interest  of  the  public.  This  is  an  act  of  com- 
petition and  therefore  in  the  interest  of  the  pubUc. 
This  reminds  one  of  Aristotle's  logic,  but  it  is  not  in 
agreement  with  his  ethics  in  which  he  says  that  know- 
ledge is  virtue  provided  it  was  knowledge  of  the  major 
and  minor  premises  in  their  proper  relationship.  I 
rather  think  Aristotle  was  right.  You  must  be  sure  of 
your  major  premise  and  then  that  the  minor  comes  with- 
in its  major  before  it  is  possible  to  draw  a  proper  con- 
clusion. The  difficulty  with  the  conservative  judges  is 
that  they  do  not  examine  their  premises,  whether  they 
are  true  or  not.  They  assume  in  their  major  premise 
that  competition  is  the  life  of  trade,  is  an  eternal  law  of 
nature.    They  then  merely  determine  whether  the  case 


CHAPTER  THREE  119 

at  bar  is  a  case  of  competition.  If  it  is,  it  must  be  a 
part  of  the  eternal  order,  and  therefore  privileged. 
They  make  no  effort  to  distinguish  between  kinds  of 
competition,  and  assume  with  equal  naivete  that  to 
distinguish  between  fair  and  unfair  competition  passes 
the  power  of  the  courts  and  of  the  human  understand- 
ing. 

In  contrast  to  such  a  naive  syllogistic  procedure,  is 
the  logic  underlying  the  opinions  of  the  liberal  judges. 
For  want  of  better  terms,  I  shall  call  this  the  func- 
tional, genetic,  evolutionary,  historical,  or  situational 
logic.  For  the  sake  of  brevity,  I  shall  restrict  myself 
to  the  term  functional.  According  to  this  method  in 
ethics,  we  take  the  view  that  morals  are  group  habits 
formed  to  meet  the  requirements  of  a  particular  situa- 
tion and  are  right,  or  function  satisfactorily,  when  they 
satisfy  the  wants  of  the  group  in  that  situation.  If  a 
conflict  arises,  we  should  discover  the  conditions  out 
of  which  it  arose,  find  out  how  the  old  system  of  morals 
originated,  analyze  the  situation  in  which  it  func- 
tioned, and  find  out  the  elements  which  made  the  old 
system  satisfactory,  analyze  the  new  elements  in  the 
changed  situation  which  impair  the  usual  functioning  of 
the  old  morals,  then  project  an  hypothetical  solution, 
keeping  the  good  of  the  old  system  as  much  as  possible 
and  making  changes  only  for  the  new  elements,  and, 
finally,  try  out  the  proposed  solution  in  a  practical 
way. 

In  agreement  with  this  method,  we  have  found  that 
the  competitive  system  grew  out  of  ancient  conditions 
of  monopoly  and  was  approved  by  the  judge  of  the 


120  MONOPOLY  AND  COMPETITION 

transition  period  because  it  better  satisfied  the  interests 
of  the  pubhc.  It  did  this  because  it  allowed  free  range 
to  individual  incentive  and  capacity;  and  success 
depended,  among  other  things,  on  good  management, 
prompt  service,  considerate  treatment  of  customers, 
abiUty  to  produce  and  sell  goods  of  a  quality  and  price 
demanded  by  the  customers,  and  on  capital,  which 
however,  was  only  one  element.  With  reference  to 
the  traders,  the  system  was  a  success  because  they  were 
approximately  equal  in  capital;  and  one  could  play 
"  the  rule  of  the  game"  as  effectively  as  the  other.  Un- 
der such  conditions,  competition  was  the  life  of  trade, 
that  is,  on  the  whole  it  was  worth  more  to  the  public 
than  it  cost.  When,  however,  a  combination  is  intro- 
duced into  these  conditions,  then  success  depends  prin- 
cipally on  the  single  element  of  capital  against  which 
the  other  elements  of  success  in  the  small  trader  are  of 
little  avail.  Competition,  as  between  the  combination 
and  the  individual  trader,  instead  of  being  the  life  of 
trade,  becomes  the  restraint  of  trade,  the  outcome  of 
which  is  inimical  to  the  interests  of  the  public. 

When,  under  these  conditions,  a  judge  tells  us  that 
what  is  right  for  an  individual  is  also  right  for  a  com- 
bination, he  is  unconsciously  basing  rights  upon  the 
single  element  of  capital.  He  fails  to  see  that  this 
element  in  the  combination  destroys  all  the  other  values 
of  the  competitive  system.  He  assumes  that  a  differ- 
ence in  magnitude  does  not  produce  a  difference  in 
kind  and  he  is  led  into  this  assumption  because  in  law 
both  the  individual  trader  and  the  combination  possess 
the  common  name  of  "person."     When,  however,  the 


CHAPTER  THREE  121 

individual  person  and  the  corporate  person  are  analyzed 
and  the  elements  of  success  in  each  are  made  distinct, 
then  such  propositions  fall  to  the  ground.  In  general, 
the  judge  who  commits  such  fallacies  fails  to  analyze 
the  situation  in  which  the  morals  in  question  function. 
He  is  satisfied  to  refer  to  cases  which  have  nothing 
more  in  common  than  some  problem  of  competition, 
and  then  to  argue  that,  if  in  the  case  at  hand,  nothing 
was  committed  that  was  forbidden  in  the  past,  the 
act  complained  of  is  just  and  lawful.  This  sort  of 
procedure  is  quite  correct  when  the  cases  referred  to 
and  the  act  in  question  present  identical  situations.  It 
is  then  a  matter  of  prudence  to  apply  to  the  present 
situation  what  has  proved  successful  in  identical  situa- 
tions in  the  past,  and,  only  when  such  a  motive  is 
present  in  the  consciousness  of  the  judge,  is  this  refer- 
ence to  past  cases  profitable.  But  the  judge  who  says 
that  what  is  lawful  for  individuals  is  lawful  for  com- 
binations wholly  ignores  their  respective  situations  and 
deals  only  with  rules  in  the  abstract.  He  assumes  that 
an  old  competitive  rule  must  ipso  facto  apply  to  a  com- 
petitive situation,  forgetting  that  one  competitive  situa- 
tion may  be  wholly  different  from  another.  A  judge 
proceeding  in  this  way,  rather  than  take  the  pams  of 
analyzing  the  differences  in  situation,  which  make  a 
rule  right  in  one  case  and  wrong  in  another,  will  rather 
devise  new  arguments  in  defense  of  the  old  rule  such  as 
"the  survival  of  the  fittest,"  "the  interests  of  the 
stronger,"  "the  right  to  pursue  trade  for  one's  own 
interests,"  and  so  on.  We  may  accept  these  argu- 
ments and  assume  with  them  that  right  is  with  the 


122  MONOPOLY  AND  COMPETITION 

stronger,  if  we  remember  that  both  individuals  and 
combinations  are  members  within  the  state,  which, 
being  the  strongest  of  all,  may,  on  Judge  Brannon's 
principle  of  "natural  law,"  crush  either  individuals  or 
combinations,  provided  it  is  for  the  state's  "own  inter- 
est." These  would  be  "natural"  acts;  for,  if  the  acts 
by  which  a  combination  destroys  competitors  are  "na- 
tural," the  acts  of  the  state,  which  is  the  mother  of  the 
combination,  cannot  be  other  than  "natural." 

It  is  not  necessary  to  say  more  in  criticism  of  the 
conservative  opinions.  They  are  based  on  fallacies, 
and,  of  such  fallacies,  monopolies  are  an  expression. 
How  they  are,  we  have  indicated  above.  I  wish,  how- 
ever, to  make  clear  the  merits  and  reasonableness  of 
the  opinion  of  the  liberal  judges.  They  are  conscious 
of  the  grounds  upon  which  laws  are  based,  and,  that 
this  consciousness  is  a  fundamental  cause  of  these 
enlightened  opinions,  is  evident  to  everyone  who  reads 
them.  An  equally  fundamental  factor  is  that  they 
study,  not  only  the  concrete  situation  in  which  the 
laws  in  question  function,  but  also  their  concrete  effects 
upon  society.  It  is  this  which  reveals  to  them  that  a 
difference  in  magnitude  makes  a  difference  in  kind  and 
that  a  changed  situation  demands  a  new  rule.  This  is 
not  derived  from  a  priori  and  syllogistic  reasoning,  but 
is  made  evident  by  inductive  reasoning  from  experience, 
from  facts  of  observation.  And,  by  analogy,  if  birds 
must  have  a  different  sort  of  locomotion  in  the  air  than 
on  the  earth,  and,  if  fishes  must  breathe  differently 
from  horses,  it  is  not  unreasonable  that  large  com- 
binations should  have  a  different  method  of  conducting 


CHAPTER  THREE  123 

business  than  small  traders.  In  all  cases,  it  is  the 
changed  situation  that  demands  a  new  behavior. 
Morals  are  no  exception  to  the  functional  character  of 
biological  behavior  of  which  they  are  a  part.  To  know 
this  fact  is  more  important  in  the  administration  of 
justice  than  to  know  law.  What  judges  need  is  not 
so  much  a  knowledge  of  law  as  a  knowledge  of  philoso- 
phy, and  by  philosophy  in  this  connection  I  mean  a 
knowledge  of  the  principles,  logical  and  ethical,  upon 
which  morals  are  based,  on  awareness  of  the  proper  sort 
of  methodology  in  practical  reasoning. 

Aside  from  the  matter  of  methodology,  the  issue  in 
conflict  of  these  cases  is  whether  business  is  a  matter 
of  private  interest  and  of  private  law,  or  a  matter  of 
public  interest  and  public  law.  The  conservative 
judges  take  the  former  view;  and  the  liberal  judges  the 
latter  view.  The  conservatives,  therefore,  do  not  see 
a  difference  in  kind  between  the  business  of  a  private 
individual  and  that  of  a  large  combination.  The  lib- 
erals say  that,  because  business  is  affected  with  a  public 
interest,  the  combination  cannot  refuse  service  to  any- 
one, but  must,  without  discrimination,  serve  all  who 
apply;  and  further  that  it  cannot  destroy  competition 
by  doing  business  at  a  loss.  The  difference  in  magni- 
tude between  a  private  individual  and  a  corporation 
is  important  here.  When  a  corporation  becomes  so 
large  that  its  capital,  business  organization,  and  num- 
ber of  employees  equals  that  of  the  government  itself, 
and,  when  it  supplies  an  article  of  necessity  to  every 
community  throughout  the  state's  territory,  it  holds 
within  its  grip  the  fortunes  of  individuals  quite  as  much 


124  MONOPOLY  ANT)  COMPETITION 

as  the  state  itself,  and  is  equally  afifected  with  a  public 
interest.  To  anyone  alive  to  modern  conditions,  there 
can  be  no  doubt  that  business  combinations  should 
come  within  the  public  law  and  perform  their  duties 
with  the  same  sense  of  obligation  as  the  state  itself; 
that  is,  give  service  to  all  impartially  and  without  dis- 
crimination. Such  a  regime  has,  besides  the  economi- 
cal advantage  by  compelling  both  combination  and 
individual  to  succeed  on  their  merits,  for  it  allows  the 
individual  to  engage  in  business  beside  the  combina- 
tion, provided  he  can  produce  just  as  cheaply  and  sell 
at  the  same  margin  of  profit.  If,  however,  the  individ- 
ual trader  cannot  succeed  under  these  conditions,  it  is 
difficult  to  see  how  the  public  is  benefited  by  his  reten- 
tion. The  state  then  might  allow  monopoly  and  check 
the  competition  on  prices  by  government  regulation. 
I  cannot  properly  conclude  this  section  without  rais- 
ing the  question  of  the  meaning  of  public  interest, 
which  is  the  ethical  criterion  used  by  the  liberal  judges 
and  also  referred  to  by  one  of  the  conservative.  That 
an  adequate  analysis  of  this  concept  is  necessary  is 
evident  because  different  judges  come  to  opposite  con- 
clusions in  reasoning  from  the  same  standard.  This 
must  be  the  case  so  long  as  its  meaning  is  left  to  indi- 
vidual opinion. 


CHAPTER  IV 

The    Change   from   Private    to    Public    Service 
Methods  in  Determining  Prices' 

We  have  seen  that  the  tendency  of  the  Hberal  judges, 
quoted  in  the  last  chapter,  is  to  treat  large  industrial 
corporations  as  affected  with  a  public  interest  and 
impose  upon  them  the  same  restrictions  and  obligations 
as  are  now  imposed  upon  public  service  corporations 
like  the  railroads.  If  this  view  should  be  generally 
accepted,  the  courts  will  have  the  additional  obligation 
to  determine  what  fair  prices  are  for  the  commodities  of 
these  corporations,  just  as  they  had  to  determine  what 
fair  rates  are  for  a  railroad.  Little  has  been  done  in 
this  direction,  but  the  conflict  will  be  the  same  as  in 
the  previous  cases;  that  is,  whether  large  industrial 
combinations  should  continue  to  charge  all  that  the 
commodities  will  bear,  the  principle  of  competitive  and 
private  business,  or  whether  they  should  base  their 
prices  upon  cost  of  production,  the  principle  of  public 
service  business.  In  order  to  decide  upon  this  issue, 
we  must  again  review  the  conditions  that  are  supposed  " 
to  determine  fair  prices  in  competition  and  then  exam- 
ine how  these  conditions  are  changed  in  a  monopolistic 
business. 

Section  I.     The  principle  for  determining  a  fair  price 
under  competition. 

In  the  competitive  system  it  is  supposed  that  charg- 
ing all  you  can  get  in  an  open  market  determines  a 

^\  partial  reproduction  of  the  author's  paper,  "The  Combina- 
tion versus  The  Consumer,"  Int.  J.  of  Ethics,  Jan.  1913. 


126  MONOPOLY  AND  CORPORATION 

fair  price.  In  Adam  Smith's  system,  such  a  price  was 
called  the  natural  price  of  a  commodity  and  covered  the 
cost  of  bringing  an  article  to  market,  including  subsis- 
tence for  the  wage-earner,  subsistence  for  the  trader, 
and  the  ordinary  rent  to  the  land-owner.  The  rela- 
tions of  supply  and  demand  tended  to  keep  the  market 
price  at  the  level  of  the  natural  price.  Adam  Smith's 
argument  for  this  tendency  is  as  follows: 

"If  at  any  time  it  (the  quantity  of  any  commodity) 
exceeds  the  effectual  demand,  some  of  the  component 
parts  of  the  price  must  be  paid  below  their  natural 
rate.  If  it  is  rent,  the  interest  of  the  landlords  will 
immediately  prompt  them  to  withdraw  a  part  of  their 
land;  and  if  it  is  wages  or  profit,  the  interest  of  the 
laborers  in  the  one  case,  and  of  their  employers  in  the 
other,  will  prompt  them  to  withdraw  a  part  of  their 
labor  or  stock  from  this  employment.  The  quantity 
brought  to  market  will  soon  be  no  more  than  to  supply 
the  effectual  demand.  All  the  different  parts  of  the 
price  will  rise  to  their  natural  rate,  and  the  whole  price 
to  its  natural  price.  If,  on  the  contrary,  the  quantity 
brought  to  market  should  at  any  time  fall  short  of  the 
effectual  demand,  some  of  the  component  parts  of  the 
price  must  rise  above  their  natural  rate.  If  it  is  the 
rent,  the  interest  of  all  other  landlords  will  prompt  them 
to  prepare  more  land  for  the  raising  of  this  commodity ; 
if  it  is  wages  or  profit,  the  interest  of  all  other  laborers 
and  dealers  will  soon  prompt  them  to  employ  more  labor 
and  stock  in  preparing  and  bringing  it  to  market. 
"The  quantity  brought  thither  will  soon  be  sufficient 
to  supply  the  effectual  demand.     All  the  different  parts 


CHAPTER  FOUR  127 

of  the  price  will  soon  sink  to  their  natural  rate,  and  the 
whole  price  to  its  natural  price. 

"The  natural  price,  therefore,  is  as  it  were,  the  central 
price  to  which  the  prices  of  all  commodities  are  con- 
tinually <];ravitating.  Different  accidents  may  some- 
times keep  them  suspended  a  good  deal  above  it,  and 
sometimes  even  force  them  down  below  it.  But  what- 
ever may  be  the  obstacles  which  hinder  them  from 
settling  in  this  center  of  repose  and  continuance,  they 
are  constantly  tending  towards  it."^ 

A  modern  version  of  this  argument  with  its  ethical 
bearings  is  given  by  President  Hadley:  "The  idea  that 
each  article  has  a  value  or  just  price  based  on  its  cost 
of  production,  and  that  the  trade  is  moral  or  immoral 
according  as  the  trader  based  his  charge  upon  this  cost, 
was  at  one  time  quite  universal  and  is  held  by  many 
persons  even  at  the  present  day.  .  .  .  To  begin  with, 
while  it  makes  provision  against  extortionate  profits  by 
the  trader  on  some  articles,  it  does  not  say  how  he  is 
to  be  protected  against  losses  on  others.  What  will 
happen  if  buyers  are  not  prepared  to  pay  a  price  for 
the  article  which  covers  the  cost  of  production?  You 
cannot  compel  a  man  to  purchase  when  he  would 
rather  go  without  the  articles  than  pay  the  price 
charged.  You  cannot  compel  the  trader  to  leave  the 
goods  unsold  on  his  shelves  because  the  just  price  is 
not  forthcoming.  You  must  let  him  sell  at  a  loss. 
But  if  he  sells  some  things  at  a  loss  and  is  only  allowed 
a  fair  profit  on  others,  his  business  in  general  is  a 

^  Wealth  of  Nations,  Cannan's  edition,  pp.  59,  60. 


128  MONOPOLY  AND  COMPETITION 

losing  one.  He  must  be  allowed  to  make  extra  charges 
on  the  things  that  the  pubUc  will  buy,  to  make  up  for 
his  failures  on  the  things  the  public  will  not  buy. 

"But  there  is  a  deeper  practical  difficulty  than  this. 
The  attempt  to  prohibit  a  trader  from  selling  an  article 
for  more  than  it  cost  may  become  disadvantageous  to 
society  as  a  whole.  Take  a  concrete  case,  which  was 
frequently  occurring  in  mediaeval  communities.  There 
is  a  scarcity  of  wheat  and  a  deficiency  in  the  bread  sup- 
ply. Those  who  have  the  wheat  or  the  bread  to  sell 
are  anxious  to  put  the  price  up.  They  are  not  allowed 
to  do  it.  The  church  threatens  them  with  everlasting 
penalties  in  the  next  world,  and,  more  immediate  if  not 
more  important,  the  magistrates  threaten  to  cut  off 
their  ears  in  this.  Of  course,  the  price  stays  where  it 
was.  No  man  is  going  to  imperil  his  soul's  salvation 
and  his  ears  at  the  same  time.  The  consequence  is 
that,  as  long  as  the  supply  lasts,  the  consumption  of 
bread  goes  on  at  the  same  rate  as  before.  Then  there 
is  a  sudden  and  appalling  famine  in  which  whole  vil- 
lages are  desolated.  Contrast  the  working  of  the 
modern  principle  of  letting  people  charge  what  they 
can  get.  Those  who  own  the  food  supplies  raise  their 
prices  as  soon  as  they  see  the  scarcity  threatening. 
This  enhancement  of  price  causes  people  to  be  more 
economical  in  the  use  of  bread,  so  that  the  old  supply 
lasts  longer.  It  also  gives  people  a  motive  to  arrange 
for  the  importation  of  wheat  from  other  markets  in 
time  to  prevent  the  most  acute  forms  of  famine.  Of 
course,  there  is  some  hardship.  The  poor  feel  the 
increased  price  of  bread  acutely;  and  when  they  see 


CHAPTER  FOUR  129 

that  this  price  goes  to  swell  the  profits  of  traders  who 
had  more  money  than  the  consumers  to  begin  with, 
they  are  more  jealous  of  the  injustice.  But  the  moder- 
ate hardship  to  the  consumer  when  the  price  of  bread 
begins  to  rise  prevents  the  awful  and  appalling  loss 
which  he  would  suflfer  in  seeing  his  children  die  before 
his  eyes  if  all  the  bread  in  the  community  were  used 
up;  and  the  extra  profit  to  the  seller  is  a  small  price  for 
the  public  to  pay  if  the  seller  thereby  is  stimulated  to 
bring  in  additional  supplies  before  the  acute  stage  of 
famine  is  reached.   .   .  . 

"If  you  fix  an  arbitrary  price,  there  may  be  a  per- 
manent scarcity,  where  some  of  those  who  most  want  a 
thing  will  not  get  it  at  all.  If  you  let  the  price  fix  itself, 
the  men  who  want  it  most  get  the  thing  for  the  moment, 
while  the  producers  who  charge  unfair  profits  soon  find 
the  price  reduced  to  the  level  of  cost  of  production  by 
the  competition  of  others  who  enter  the  same  line  of 
business.  .  .  .  Instead  of  saying  that  a  just  price  was 
one  that  conformed  to  the  cost  of  production,  they 
(the  followers  of  Adam  Smith)  said  that  a  just  price 
was  one  that  was  obtained  under  fair  competition  in  an 
open  market.  The  competition  of  producers  prevented 
it  from  getting  too  high;  the  competition  of  consumers 
prevented  it  from  getting  too  low.  The  net  result  was 
a  price  that  better  met  the  necessities  of  society  than 
any  other;  and  the  trader,  as  long  as  his  actions  were 
fair  and  above  board,  did  a  public  service  by  producing 
this  competitive  market  price  which  fully  warranted 
him  in  pocketing  any  he  could  get.  In  the  eyes  of 
those  who  held  this  \iew,  any  price  which  could  be 


130  MONOPOLY  AND  COMPETITION 

thus  obtained,  without  fraud  or  concealment,  was  of 
itself  a  fair  price."^ 

For  convenience  President  Hadley's  argument  may- 
be summed  up  as  follows:  (1)  You  cannot  charge  more 
than  the  commodity  will  bear.  But  if  this  price  falls 
below  cost  on  some  articles,  you  must  make  up  the 
deficiency  by  charging  extra  prices  on  other  commodi- 
ties that  will  bear  them.  (2)  A  fixed  price  conformmg 
to  cost  may  result  in  waste  and  scarcity.  But  this  is 
avoided  by  leaving  the  price  free  since  it  necessitates 
thrift  and  increased  production.  (3)  Under  a  fixed 
price,  people  who  most  want  a  thing  often  fail  to  get  it, 
while  under  a  free  price  they  are  able  to  get  it  by  paying 
the  price.  (4)  A  price  determined  naturally  in  an  open 
competitive  market  is  just,  since  if  one  merchant  charges 
extortionately,  his  competitor  promptly  undersells  him. 
(5)  Therefore,  prices  and  production,  if  left  to  them- 
selves, produce  far  more  favorable  results  to  society 
than  a  system  of  control  according  to  some  imaginary 
standards  of  justice. 

The  soundness  of  this  argument  for  the  natural  and 
automatic  justice  resulting  from  the  competitive  system 
depends  altogether  upon  the  truth  of  the  underlying 
assumptions,  namely,  those  of  fair  competition  and  an 
open  and  free  market.  With  reference  to  the  open 
market  it  assumes  a  free  flux  and  change  of  all  the 
factors  of  industry.  If  the  laborer  is  engaged  in  an 
industry  in  which  there  is  an  over-production,  he  is 
free  either  to  withdraw  or  to  change  to  an  industry  in 
which  there  is  a  scarcity  of  production.  Similarly,  the 
^Standards  of  Public  Morality,  pp.  37-43. 


CHAPTER  FOUR  131 

capitalist  can  either  shut  down  his  plant  or  lake  up 
another  line  of  manufacturing,  and  the  land-owner  can 
either  withdraw  his  land  or  begin  growing  crops  in 
which  production  is  scarce.  That  is  to  say,  a  laborer  is 
free  to  stop  coal-mining  and  promptly  begin  work  either 
as  a  baker  or  an  engineer  or  as  a  skilled  mechanic  in  a 
steel  plant.  The  rolling  mills  in  steel  could  stop  turn- 
ing out  steel  rails  and  begin  the  manufacture  of  shoes 
or  lumber. 

Not  only  is  such  a  perfect  flux  required  to  make  the 
system  always  yield  natural  prices  but  also  a  pre- 
knowledge  of  all  the  conditions  and  factors  that  bring 
about  changes  in  the  market  price.  For  example,  if 
there  were  going  to  be  a  dry  season  in  Western  Canada, 
during  the  next  year  and  a  favorable  season  in  Southern 
Russia,  the  Russians,  in  order  to  avoid  scarcity  in  the 
wheat  market,  would  have  to  know  this  fact  and  bring 
a  greater  number  of  fields  under  cultivation,  and  the 
Canadians  would  have  to  know  it  so  as  to  avoid  an 
over-supply  of  labor  and  a  useless  putting  out  of  crops. 
The  over-supply  of  labor  in  Canada  would  either  have 
to  move  to  Russia  or  find  employment  in  other  indus- 
tries in  which  there  would  be  a  scarcity  of  production. 
In  fact,  nothing  short  of  an  absolute  knowledge  of  the 
world  would  satisfy  the  necessary  conditions. 

It  is  well  known  that  this  mobility  with  respect  to 
industry  does  not  exist.  There  is  an  element  of  per- 
manency to  be  considered.  In  the  laborer  it  is  habit; 
in  the  capitalist,  the  fixity  of  machinery;  and  in  land, 
the  nature  of  soil  in  the  relation  to  the  seasons  of  the 
year.     The  laborer  cannot  change  and  train  his  habits 


132  MONOPOLY  AND  COMPETITION 

for  a  new  trade  and  in  the  meantime  support  his  family; 
nor  is  he  free  to  withdraw  his  labor,  for  he  usually  has 
no  surplus.  The  capitalist  cannot  shut  down  his  plant 
for  a  very  long  time  without  infringing  upon  his  divi- 
dends and  credit.  Nor  can  the  land-owner  usually  fore- 
go his  rent  without  some  injury  or  failure  in  his  business 
relations.  So  far,  then,  as  there  is  permanency  in  any 
of  the  factors  of  industry,  the  natural  or  fair  price  in 
an  open  competitive  market  will  not  be  obtained.  So 
if  there  is  a  scarcity  in  wheat,  it  will  probably  be  a  year 
before  the  production  will  be  increased.  If  it  is  in 
steel,  or  in  coal,  the  scarcity  may  never  be  remedied, 
for  no  more  mines  may  be  available  to  new  com.petitors. 
In  such  a  case,  the  market  price  could  always  be  main- 
tained above  Adam  Smith's  natural  price. 

In  this  view,  then,  the  assumption  of  the  Tree  mobility 
of  the  factors  of  industry  is  taken  with  too  much  ex- 
travagance and  in  so  far  invalidates  the  natural  and 
automatic  justice  of  the  competitive  system.  There  is 
an  equal  extravagance  with  regard  to  the  assumption 
of  fair  competition.  For  competitors  fair  competition 
obtains  when  the  rules  and  opportunities  under  which 
they  operate,  apply  equally  to  all.  It  is  not  so  import- 
ant what  the  rules  are  as  it  is  to  have  them  affect  each 
alike.  We  have  seen  that  there  are  many  ways  in 
which  this  condition  is  violated.  The  combination  can 
start  a  siege  of  price-cutting  upon  a  small  trader  and 
wholly  destroy  his  business  by  spending  only  a  small 
part  of  its  capital.  Because  of  its  ability  to  supply 
the  carrier  with  a  large  and  regular  traffic,  it  can  obtain 
a  rebate  large  enough   to  cover   the  small   shipper's 


CHAPTER  FOUR  133 

profit  and  so  close  the  market  against  him.  Because  of 
its  extensive  capital  and  organization,  it  can  carry  on 
a  system  of  espionage  by  which  railroad  and  competi- 
tors' employees  are  paid  for  furnishing  information 
about  the  small  trader's  business,  through  which  in- 
formation it  can  go  to  the  competitor's  customer  and 
get  his  trade  either  by  offering  lower  prices  or  even 
by  giving  the  goods  gratis;  or,  if  it  has  a  monopoly  on 
some  goods  which  the  customer  must  have,  by  refusing 
to  trade  with  him  at  all  unless  he  ceases  to  patronize 
competitors;  or,  if  the  customer  is  a  small  dealer,  by 
threatening  to  open  competition  with  him  and  ruin 
his  business.  The  combination  can  also  promote  its 
own  business  and  injure  that  of  a  competitor  through 
improper  use  of  the  press  and  through  questionable 
advertising.  It  can  furnish  editors  with  editorials 
which  discount  the  wares  of  the  competitor  and  praise 
the  merits  of  its  own,  or  it  can  cause  advertising  to  the 
same  effect  to  be  printed  in  the  reading  columns  in  the 
form  of  disinterested  news.  It  can  also  go  before  a 
legislative  body  and  often  by  means  of  its  capital  alone 
secure  legislation  favorable  to  itself  but  unfavorable  to 
competitors;  or  it  can  employ  able  lawyers  and  solici- 
tors who,  through  their  persuasion  often  secure  the  same 
sort  of  legislation.  And  with  respect  to  matters  in  the 
courts  it  is  well  known  that  the  combination  can  ga'n 
much  through  delays  and  appeals  which  are  quite 
impossible  to  small  traders.  In  these  and  many  other 
ways  the  combination  can  carry  on  competition  from 
which  the  small  trader  is  almost  wholly  deprived  be- 


134  MONOPOLY  AND  COMPETITION 

cause  of  his  small  capital.     But  this  competition  is 
bound  ere  long  to  prove  fatal  to  his  business. 

It  is  seen,  therefore,  that  there  are  competitive  meth- 
ods and  privileges  which  do  not  aflfect  all  traders  alike. 
On  the  contrary,  they  close  the  market  to  the  small 
trader  and  bring  monopoly  to  the  combination.  The 
fair  competition  in  an  open  market  which  the  classical 
economists  and  their  followers  suppose  will  naturally, 
bring  a  fair  price  is  quite  fallacious;  for  as  soon  as  the 
competitors  become  unequal  fair  competition  comes  to 
an  end. 

Since,  therefore,  both  the  assumptions  of  the  free 
mobility  of  the  factors  of  industry  and  of  fair  compe- 
tition in  an  open  market  are  fallacious,  it  follows  that 
the  fair  price  which  these  conditions  are  supposed  to 
yield  is  a  fiction.  It  would,  however,  be  unfair  to  both 
Adam  Smith  and  President  Hadley  to  say  that  they 
failed  to  recognize  this  fiction  under  conditions  of  mon- 
opoly. The  error  is  that  President  Hadley  supposes 
fair  competition  to  prevail  generally  while  monopoly 
is  the  exception. 

Let  us  suppose  that  the  combination,  because  of  its 
carrying  on  competition  in  ways  that  are  not  open  to 
the  small  trader,  establishes  a  monopoly.  What  then 
happens  to  the  price?  The  combination  still  supposes 
that  charging  all  it  can  get  brings  a  fair  price.  The 
consumer  is  not  compelled  to  buy.  If  then  the  com- 
bination is  willing  to  sell  at  a  given  price  and  the  con- 
sumer is  willing  to  pay  that  price,  the  result  is  a  fair 
price.  Even  if  the  price  is  more  than  twice  above  cost 
the  consumer  is  still  not  overcharged  for  he  was  willing 


CHAPTER  FOUR  1.^5 

to  pay  the  price  asked.     This  is  the  point  of  view  taken 
by  the  combination.     Undoubtedly  a  contract  made 
between  two  reasonable  beings  is  fair,  provided  they  are 
equally  dependent  upon  each  other.     The  question  is  then 
whether  the  monopolist  and  the  consumer  are  equally 
dependent  upon  each  other.     The  monopolist  must,  of 
course,  sell  his  goods  in  order  to  make  profits.     He 
cannot  sell  them  for  more  than  they  will  bear.     But  his 
business  is  not  dependent  upon  any  one  individual's 
purchase.     So  what  independence  the  individual  pur- 
chaser has  is  limited  by  the  number  of  his  alternatives, 
that  is,  the  number  of  substitutes  which  he  has  for  the 
goods  which  the  monopolist  sells.     If  the  monopolist  is 
a  carrier  to  a  central  market  from  a  point  where  the 
only  important  produce  is  wheat,  it  is  clear,  as  we  have 
pointed  out  before,  that  the  farmer's  alternatives  are 
few,  that  his  profits  will  depend  upon  the  carrier's 
rates,  and  that  the  carrier  can  dictate  to  the  former 
in  what  proportion  he  shall  divide  his  profits  with  him. 
If  wheat  sells  for  80  cents  per  bushel  at  the  central 
market  and  15  cents  per  bushel  is  a  fair  rate  for  the 
carrier,  that  is,  a  rate  high  enough  to  permit  him  to 
conduct  an  efhcient  business,  then  the  farmer  should 
receive  65  cents  for  his  wheat.     But  the  carrier  may 
raise  his  rate  to  30  cents  and  reduce  the  farmer's  price 
to  50.     The  farmer  is  still  compelled  to  sell  at  50  and 
pay  the  carrier  30  for  the  grain  is  useless  in  his  gran- 
ary and  he  has  no  other  way  of  disposing  of  it.     He 
must  therefore  sell  in  order  to  be  able  to  purchase 
goods  needed,  such  as  farm  implements,  clothing,  and 
books.     Where,  then,  the  carrier  has  a  monopoly,  he 


136  MONOPOLY  AND  COMPETITION 

can  determine  in  what  proportion  the  shipper  shall 
divide  his  profits  with  him.  Again,  suppose  the  monopo- 
list is  a  manufacturer  of  gas  in  a  city.  Previous  to 
the  monopoly  there  was  competition  in  the  gas  business 
and  consumers  received  rates  of  "5  cents  per  1,000 
feet.  But  this  did  not  yield  an  average  profit  upon 
the  investment.  The  result  was  a  combination  and  the 
rates  raised  to  $1.25.  During  the  competitive  regime 
consumers  found  gas  a  cheaper  and  more  convenient 
fuel  than  any  other  materials.  Accordingly,  they  dis- 
carded all  their  stoves  and  furnaces  and  had  their 
houses  supplied  with  gas  fittings.  In  this  way  gas 
became  organized  as  a  necessary  element  in  the  con- 
sumers' lives  so  that  it  was  impossible  to  dispense  with 
it  without  great  inconvenience.  Consequently,  the  con- 
smner  will  pay  the  high  rate,  although  with  reluctance 
and  complaint.  But  a  rate  of  80  cents  may  be  enough 
to  enable  the  monopolist  to  carry  on  a  flourishing  busi- 
ness and  pay  a  good  return  upon  his  investment.  The 
extra  45  cents  must,  therefore,  be  looked  upon  as  a  tax 
which  the  manufacturer  is  able  to  levy  because  of  his 
power  of  monopoly.  Again,  the  monopolist  is  able  to 
compel  the  consumer  to  divide  his  earnings  with  him. 
To  bring  out  the  point  more  clearly,  we  may  cite  the 
classic  example  of  the  baker's  monopoly.  A  starving 
man  with  a  dollar  in  his  pocket  has  the  alternative  of 
parting  either  with  his  life  or  with  his  dollar  for  a  loaf 
of  bread.  He  chooses  to  spend  his  dollar,  although 
five  cents  would  have  been  enough  for  the  baker. 

From  these  illustrations  it  is  clearly  seen  that  when  a 
trader  once  has  a  monopoly  upon  a  useful  commodity. 


CHAPTER  FOUR  137 

the  equal  dependence  between  seller  and  buyer  is  de- 
stroyed. The  buyer  has  lost  the  alternative  of  compe- 
tition which  prevented  him  from  being  over-charged 
and  he  is  unable  to  find  substitutes  which  are  equally 
as  good  and  cheap  as  the  monopolist's  products.  So 
long,  therefore,  as  the  monopolist  is  left  to  bargain 
individuallv  with  each  consumer,  there  is  no  equality 
and  a  free  and  fair  contract  is  impossible.  To  make 
the  monopolist  and  the  consumer  equally  dependent 
upon  each  other,  all  the  consumers  must  combine  and 
bargain  collectively  with  the  monopoHst  or  combina- 
tion of  traders.  The  monopolist  then  must  sell  to  this 
combination  of  consumers  in  order  to  realize  any  profits, 
and  he  must  sell  at  such  prices  as  the  consumers  think 
reasonable.  The  consumers  would  pay  a  price  sufficient 
to  enable  the  monopolist  to  carry  on  a  flourishing  busi- 
ness and  receive  an  average  return  upon  his  capital, 
for  otherwise  they  could  not  get  the  monopolist's  goods 
in  the  quantity  and  quality  in  which  they  want  them. 
In  this  way  alone  can  the  consumer  bargain  fairly  with 
the  monopolist. 

But  then  there  is  the  practical  problem  of  forming  a 
combination  among  the  consumers,  for  in  not  a  few 
cases  the  consumers  are  scattered  over  an  entire  nation 
and,  in  some,  over  many  nations.  It  is  unnecessary 
that  the  consumers  of  separate  nations  combine,  for  as 
yet  there  is  no  combination  of  manufacturers  with  which 
a  single  nation  cannot  deal  fairly  and  equally.  But  the 
consumers  of  a  given  nation  are  already  combined  and 
have  an  organization  in  the  State.  Their  recourse  is 
then  to  have  the  State  bargain  in  their  behalf  with  the 


138  MONOPOLY  AND  COMPETITION 

monopoly.  There  are  many  reasons  for  making  this  ar- 
rangement. Only  the  State  can  bargain  fairly  with  the 
combination.  The  State  protected  consumers  against 
unreasonable  prices  in  allowing  traders  to  freely  com- 
pete with  each  other.  It  allowed  traders  to  charge  all 
they  could  get,  for  in  an  open  market  under  fair  compe- 
tition they  could  not  get  too  much.  But  competition 
often  became  too  strong  and  caused  too  many  traders 
to  fall  into  brankruptcy.  To  avoid  this,  the  State 
allowed  traders  to  combine  for  regulating  production 
and  prices.  This  made  possible  unequal  competition 
between  the  combination  and  the  small  trader.  The 
Slate  failed  to  prevent  this  and  the  result  was  monopoly. 
The  monopoly  still  kept  on  charging  all  it  could  get. 
But  charging  all  it  could  get  in  a  closed  market  under 
no  competition  proved  to  be  extortion  to  the  consumer. 
To  prevent  this,  the  State  should  again  resume  its 
protection  of  the  consumer,  not  necessarily  by  rein- 
troducing competition,  but  by  regulating  the  monopoly. 
It  should  do  this  not  only  because  of  its  former  protec- 
tion of  the  consumer  against  unfair  prices,  but  also 
because,  if  it  protects  the  trader  against  the  wastes  of 
competition  and  of  unregulated  production,  it  should 
treat  the  consumer  equally  well  by  protecting  him 
against  the  extortion  of  monopoly. 

I  believe  the  justness  and  fairness  of  this  reasoning 
and  conclusion  to  be  indisputable.  Charging  all  you 
can  get  in  an  open  market  under  fair  competition  brings 
fair  prices.  But  charging  all  you  can  get  in  a  closed 
market  under  no  competition  is  extortion  just  as  taxa- 
tion without  representation  is  tyranny.     Even  under 


CHAPTER  FOUR  139 

competition,  charging  all  you  can  get  is  not  fair  unless 
the  competition  is  fair  and  affects  all  traders  alike,  large 
or  small;  for  just  in  so  far  as  competition  is  unequal, 
and  !ust  in  so  far  as  a  trader  enjoys  monopoly,  he  can 
charge  unreasonable  prices.     If  the  State,  then,  relies 
upon  competition  to  bring  justice  to  the  consumer,  it 
should  undertake  to  make  competition  fair  and  make 
the  "rules  of  the  game"  apply  equally  to  all.     But  if 
it  allows  monopoly,  then  it  is  obliged  to  regulate  it. 
All  the  arguments  against  State  interference  wth  the 
course  of  trade,  however  applicable  to  conditions  of  fair 
competition,  lose  all  their  force  as  applied  to  monopoly; 
for,  under  monopoly,  prices  and  production  are  no  more 
free  and  left  to  adjust  themselves.     On  the  contrary 
they  are  fixed  and  regulated  by  the  monopolist.     The 
consumers  or  people  then  have  to  choose  between  a 
price  as  fixed  by  the  monopolist,  who  regulates  the 
price  primarily  with  reference  to  his  own  interests,  and 
a  price  as  fixed  by  an  intelligent  Public  Service  Com- 
missioner, who  regulates  prices  with  reference  to  the 
interests  of  all,  both  consumer  and  producer.    To  sup- 
pose that  an  intelligent  and  disinterested  commissioner 
could  not  do  as  well  as  a  self-interested  monopolist  is 
presumptuous  and  requires  proof,  especially  in  view  of 
the  success  of  some  present-day  Public  Service  Com- 
missions.    To  recite  the  failures  and  disasters  of  medi- 
aeval   regulation    is  no  argument;  for  the    mediaeval 
idea  of  a  fixed  price,  which  did  not  recognize  changes 
required  by  new  conditions,  is  not  necessarily  adopted 
by  a  modern  commission  which  does  recognize  such 
changes.      Moreover,    in    medieval    times    the    judge 


140  MONOPOLY  AND  COMPETITION 

thought  it  sufficient  to  fix  prices  %vithout  interfering 
with,  production,  and  this  was  the  cause  of  his  failure. 
But  in  the  present  day  we  are  in  control  of  both  pro- 
duction and  prices,  and,  therefore,  conditions  are 
favorable  for  the  success  of  public  regulation. 

Looking  back  over  our  argument,  I  believe  we  may 
safely  conclude  that  the  methods  of  charging  common 
between  indi\-idual  traders  in  competition  cannot  be 
adopted  without  change  by  combinations  or  monopohes. 
Such  an  adoption  is  just  as  disastrous  to  the  consumer 
as  are  the  methods  of  LndiN-idual  competitors  to  the 
small  trader  when  played  against  him  by  the  com- 
bination. To  insure  the  consumer  as  fair  deahng  under 
conditions  of  monopoly  as  he  received  from  indi\-idual 
traders  in  competition,  the  State  must  directly  regu- 
late the  monopoly.  That  is  to  say,  under  these  con- 
ditions we  must  abandon  the  view  that  the  business 
of  a  large  industrial  combination  is  a  matter  of  pri- 
vate interest  and  private  law,  and  on  the  contrary, 
we  should  treat  them  as  pubUc  service  corporations 
required  to  operate  under  the  laws  governing  a  busi- 
ness of  that  nature.  The  judicial  and  legal  problem 
will  be  solved  by  applying  to  manufacturing  and 
marketing  concerns  the  principles  now  appUed  to  rail- 
roads. 


SUMMARY 

In  regard  to  the  character  of  morals,  we  noticed  that 
the  phase  of  moraUty,  constituted  by  judicial  law,  is 
a  matter  of  growth  and  evolution.  The  growth  is 
occasioned  by  a  change  in  the  environment  or  situation 
in  which  the  laws  are  designed  to  funct'on.  When  such 
a  change  occurs,  the  old  rule  is  at  first  generally  applied 
to  the  new  situation  without  alteration.  After  it  is 
discovered  that  the  results  are  unsatisfactory,  then 
a  change  in  the  rule  is  proposed  giving  rise  to  a  conflict 
between  old  and  new  rules.  This  usually  takes  place 
between  two  types  of  judges,  namely  the  conservative 
and  the  liberal.  The  conservatives  ignore  the  changed 
conditions  and  are  governed  principally  by  precedent. 
They  merely  consider  whether  the  act  in  question  was 
forbidden  in  the  past,  and,  if  it  was  not,  they  argue  in 
a  syllogistic  fashion,  without  examining  the  grounds  of 
their  premises,  that  the  act  is  lawful.  The  liberals,  on 
the  other  hand,  take  account  of  the  changed  conditions 
and  are  governed  primarily  by  the  facts  of  the  case. 
Precedent  failing  them,  they  appeal  to  the  public  inter- 
est which  they  consider  the  criterion  of  authoritative 
law.  In  formulating  a  new  rule,  they  use  functional 
and  inductive  logic  as  against  the  syllogistic.  It  is  this 
which  enables  them  to  construct  and  reach  a  new  con- 
clusion. 

The  changing  character  of  morals  is  nowhere  more 
conspicuous  than  in  those  of  monopoly  and  competition. 


142  MONOPOLY  AND  COMPETITION 

Competitive  morals  grew  out  of  previous  monopolistic 
conditions  and  were  approved  because  they  better  satis- 
fied the  public  interest,  and,  on  the  whole,  were  worth 
more  to  society  than  they  cost.  They  functioned  satis- 
factorily so  long  as  industrial  conditions  were  genuinely 
competitive  and  individual  traders  were  approximately 
equal  in  capital.  Because  of  this,  they  in  course  of 
time  were  definitely  crystallized  into  the  common  law. 
But,  when  large  combinations  were  introduced  and  con- 
tinued the  customs  of  individual  traders,  competitive 
morals  made  the  capital  of  the  combination  the  principal 
element  of  success,  enabled  it  to  crush  small  traders 
and  establish  a  monopoly  which  was  not  in  the  interest 
of  the  public.  This  result  was  first  observed  in  the 
case  of  the  railroads  which  were  in  consequence  removed 
from  the  concept  of  private  law  and  private  business 
to  the  concept  of  public  law  and  public  business,  and 
accordingly  required  to  conduct  their  business  impar- 
tially and  without  discrimination.  Manufacturing  and 
marketing  combinations  are  now  passing  through  the 
same  stage.  I  believe  our  analysis  has  shown  that  their 
business  is  essentially  public  in  character,  and,  that  if  the 
interests  of  the  consumer  are  to  be  as  well  protected 
as  under  the  old  competitive  regime,  these  large  indus- 
trial combinations  must  be  treated  as  public  service 
corporations  governed  by  public  law  instead  of  by  pri- 
vate law.  The  fact  that  they  now  operate  under  pri- 
vate law  is  the  principal  cause  of  our  present  industrial 
problems. 

As  business  conditions  change  from  the  private,  indi- 
vidual, and  competitive  system  to  the  public,  combina- 


SUMMARY  143 

tional,  and  monopolistic  system,  there  must  be  a  cor- 
responding change  in  the  working  principles  from  charg- 
ing what  the  commodity  or  traffic  will  bear  to  charging 
prices  and  rates  yielding  a  fair  profit  over  cost  of  pro- 
duction or  service.  In  general,  this  is  a  change  from 
charging  all  you  can  gel  to  charging  only  what  is  needed 
for  conducting  an  efficient  business. 


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